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Home | K&S Blog | WHAT TO LOOK FOR IN YOUR HOME MORTGAGE: KEY TERMS (PART III)
WHAT TO LOOK FOR IN YOUR HOME MORTGAGE: KEY TERMS (PART III)

03/29/2012

   This is the third article in our series on home mortgages.  It is important to understand the basic elements of your typical home/condominium mortgage in order to efficiently complete your initial financing or re‑financing.  Last week we addressed the fixed-rate mortgage versus the adjustable rate mortgage; appraisal of your property, the APR; bridge loans; and the cash-out financing.  This week we will review a few more important elements of the mortgage process.

CASH OUT RE-FINANCING
 
   The first issue with attempting to secure a “cash out re‑financing” starts with your bank.  Many banks are loathe to complete a cash out re‑financing.  That makes the mortgage process more complicated and usually much lengthier.  Your broker should be able to advise you which banks like to do cash out deals.  

   Another type of cash out is the “reverse mortgage.”  Essentially, this is a loan to an elderly homeowner in which the unpaid principal balance increases over time.  The balance is only repaid when the owner dies, moves out of the home permanently, or sells the home.  I am going to prepare an entire article on the ills of the reverse mortgage phenomenon.  Suffice it to say that my legal experience with these instruments results in a very simple piece of advice:  never, ever take a reverse mortgage for any reason for an elderly client.  More than a few senior citizens have lost their homes because of their reverse mortgage.

CLOSING THE DEAL
 
   On a re‑finance, there is no transfer of ownership so the closing is simpler than it would be for a home or condominium purchase.  Often there is no counsel involved for either side.  However, I recommend that every borrower retain counsel to at least quickly review the loan documents that you plan on signing.  This insures that there are no surprises in the loan documentation which may come back to hurt you at a later date.  An experienced lawyer can provide this service for the cost of only a few hundred dollars.  The investment is well worth it.

   The closing includes repayment of the old lender and setting up the relationship with your new lender.  There is usually no negotiation of the terms permitted by your lender.

CO-BORROWERS OR GUARANTORS
 
   This comes into play when the initial borrower has insufficient or bad credit to qualify for a particular loan.  Most banks will allow co‑borrowers to sign the loan documents, in case the original borrower fails to meet certain criteria.  Essentially, this means that the co‑borrower could be legally obligated to pay any deficiency in the event of foreclosure of the property at some point in the future.

CONFORMING MORTGAGE
 
   This is an important term for the applicable interest rate for your loan.  These are loans eligible for purchase by the FNMA, also known as Fannie Mae, and FHLMC, also known as Freddie Mac.  These are the two principal federal agencies that purchase home mortgages.  The threshold for the Fannie Mae and Freddie Mac mortgage acquisition program is the key number for any borrower.  The present maximum loan amount is $417,000.  There are other requirements as well, most of them too technical for the purposes of this series.

CREDIT REPORT AND CREDIT SCORE
 
   This is probably the most important report, other than the appraisal, for your entire re‑financing.  This report, usually received from all three major credit bureaus, contains a wealth of information dealing with your credit worthiness.  It provides a complete credit history for the individual, going back for a period of up to seven years.  You would be amazed at the amount of information the credit bureaus have relating to your economic history.

   Your credit score is a numerical grade or score based upon all the elements of your credit history.  There are several dozen factors and figures that are used to produce the individual’s credit score, which is really a summary of an individual’s credit worthiness.  FICO, or the Fair Isaac Co. score, is the most widely used algorhythm used to produce credit scores.

   Among the many items used to produce this score are:
•    payment history on other mortgages, credit lines, and credit cards;
•    judgments and liens against the individual;
•    credit inquiries made over the prior twelve months; and
•    address and employment information.
   Based upon all these and many more items, your score is generated.
 
   Scores are reduced most commonly for the following reasons:
•    the amount owed on your credit accounts is too high;
•    your balances on your accounts are too high in proportion to your credit limits on each account;
•    you have delinquencies in one or more of your accounts;
•    you have one or more judgments against you; and
•    you have too many credit inquiries in the last twelve months.
   There are many more negative factors, too many to mention in this article.
 
   I will discuss the most common techniques to repair one’s credit history in an upcoming article.  This area of credit repair deserves extensive, separate treatment.

    Next week I will address a few more issues in the mortgage lending process.

    Have a happy and healthy Pesach.




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