How Does a Mortgage Subordination Agreement Work?

First of all, what in the world is a mortgage subordination, and what is a mortgage subordination agreement?

When you have two mortgages on a property, one must be subordinate to, or behind, the other. This all comes down to who gets paid first in the event that the property goes into foreclosure and needs to be sold. Any time there is more than one mortgage on a property, a subordination agreement must be put into place to clarify who will be in what is called “first position.”

Typically, on a home with two mortgages, the more traditional (as in a 15- or 30-year fixed mortgage) will be in first position, then the second mortgage (which could be a home equity loan or line of credit) will be in second.

One lender may carry both the first and second mortgages on a property, but in many cases, a lender may want to limit their exposure on a property by holding only one of the mortgages.

The second mortgage may be taken out at the same time as the first or at some later date. A subordination agreement would also be needed, for example, if you had both a first and a second mortgage and wanted to refinance only the first mortgage.

In this case, the new first mortgage lender would have to create a subordination agreement with the lender of the existing second. Without this, the lender of the second mortgage could move into first position after the original first mortgage is paid off.

So why would any lender want to stand in line behind another? Because second mortgage lenders can charge higher interest rates than first mortgage lenders.

Please let me know if I can answer any additional questions you have about how mortgage subordination and subordination agreements work. I’m always here to help.

What Is a Mortgage Recast and Is There a Benefit?

A mortgage recast is similar to you paying down your mortgage but in a different way. The traditional way to pay down your mortgage is to simply increase the payment you make and tell your lender that you want to apply the excess toward your principal balance.

Doing this will get your mortgage paid off more quickly, but at the same time, the minimum you need to send in each month will be the same as it has always been.

A recast works a little bit differently. Here, you give your lender a set amount of money to pay down the loan. Unlike in the prior example, though, your loan payment will be recalculated downward after the new money has been factored in.

There are both upsides and downsides to doing this. Let’s look at both.

You paying down the loan using a recast would, of course, lower your payment, both for interest and principal each month. This would lower your overall month-to-month obligations, and looking at this for the long term, and you would have much less outlay in terms of principal and interest expense.

The drawbacks are that doing the recast wouldn’t get your loan paid off any faster (though you could still pay it down further) and that the lender will charge you a non-refundable fee to do this.

If you have further questions about how recasts work, I am here, at your service, to answer any and all of them. Please either call or email me.

How Does an Appraisal Work on a Purchase Transaction?

If you are purchasing a home and planning on borrowing money when doing this, your lender will want an appraisal on the property. So, what exactly is an appraisal?

An appraisal is an evaluation of the property for two main reasons. The first is to see what general condition the property is in.

Keep in mind that while appraisers are looking for specific things in a property, such as the condition of the roof, kitchen, bathrooms, etc., they won’t go into as much detail as a home inspector would. Home inspectors will look into the property much more thoroughly, such as checking the electrical, heating and plumbing systems.

The second reason for the appraisal to be ordered is to see how this property compares to other similar and similarly priced properties in the area, called comparables. All properties have unique qualities that make them worth more or less than their comparables.

These are necessary so the lender has an idea of what they could sell the property for should the buyer be unable to make the payments.

As far as how the appraisal process itself works, it all starts with the signing of the contract. Once this happens, the appraisal is ordered, and you pay for the cost of the appraisal upfront.

The lender then contracts out what is called an appraisal management company (AMC) to perform the appraisal. These are third-party companies whose appraisers, by design, have no contact with the lender itself. This is to prevent any influence from the lender.

Once the appraisal is complete, it is sent to the AMC for review, then to the lender.

If you have further questions about how appraisals work, I am here, at your service, to answer any and all of them. I am just a call or email away .

What Debt Will Be Used on My Mortgage Application?

The debt that will be used on your mortgage loan application will largely be what comes off of your credit report. This mainly means things like installment payments, which includes car payments. It also means revolving debt, which is made up of credit card debt.

What it doesn’t include, in most cases, are things like monthly expenses for groceries, clothing, etc.

What you will also need to disclose, even if it isn’t on your credit report, is any type of alimony or child support payments that you are required to make, though they would appear on a divorce decree.

If you have this type of debt and you don’t disclose it, if the lender were to find out about it through court documents (yes, they do pull those), then that is considered fraud and would start a new process in itself.

All of the debt on your credit report will be used to calculate your financial ratios, with at least one exception. This is installment debt, such as a car loan, where there are 10 or fewer payments remaining on the loan. At this point in the loan, the lender will remove this debt from your ratios.

Along these lines, it is a good idea to have your credit regularly pulled so you can see exactly what the lender will see when they pull it at the time of application.

Should you have further questions I can answer about debt on your mortgage application or even would like me to pull your credit, please give me a call.

When Is the Best Time of the Month to Close?

There really is no best time to close, and if you are purchasing a home rather than refinancing one, the closing date will have to be worked out with the seller, and they normally get preference, as they may be timing the transaction with you to coincide with another transaction or activity, such as buying the next house they’re moving into.

The day of the month you close will, though, impact how much money you will need to take to closing. If you close earlier in the month, you’ll generally need more money to close the deal than you will at the end of the month.

This is largely because of mortgage interest costs. Let’s take a simple example. If the interest you pay on your mortgage, at least initially, comes out to $1,000 per month and you close in the middle of the month, say, on September 15, the lender will want $500 in what is called prepaid interest.

This is to cover the interest from September 15 through September 30. Then your first payment will be due November 1.

For that November 1 payment, you’ll pay the interest (and principal) for the period of October 1 through October 31. This is called paying in arrears or paying interest for a month at the end of that month, and it is how mortgage payments work.

The other thing to consider with regard to when to close is property tax payments. Different taxing bodies, namely counties, collect taxes at different times of the year in what are called installments.

These could, for example, be collected in June and September, with half of the annual tax bill due in each installment. Certain months will require less at closing than others.

A number of factors go into deciding when is the best time to close. I would be happy to go over them with you and help you make the decision that’s best for you. I’m always here to help. You can reach me by phone and by email.

Is There a Best Time to Lock in an Interest Rate for a Mortgage?

This is a really good question and one that nobody, including your lender, would be able to give you a definitive answer to. Mortgage rates are based on what the market as a whole is doing.

In the typical day-to-day operations of the market, fluctuation is normal. And since this fluctuation is expected, nobody can predict what it will do from one day to the next.

In nontypical times, such as when major events happen, both here and in other parts of the world, they can impact our economy and, hence, mortgage rates.

Tying this information into the original question of when you should lock in your mortgage rate, the answer typically is at the end of the process, meaning when you are close to your closing date.

In fact, many lenders will allow you to lock in an interest rate only after they have approved all of your documentation and have seen a completed appraisal on the property. So why is this?

Because it costs lenders money to set aside funds that they intend to lend to a buyer. If they lock your rate too soon and there are challenges down the road that cause the deal to either stall or end completely, they will still incur these costs.

Things that cause this to happen include problems with the accuracy of information that the buyer provided or issues with the property itself or even the seller.

I’m here to help, and I’m just a call or email away. Please let me know if I can answer any questions you have about locking in your interest rate and how any of this works.

What Do Mortgage Points Mean in the Lending Process?

A point in the lending world is one percent of the loan amount you are taking. You are probably most familiar with this term, though, through different forms of lender advertising.

Lenders let you know that you can get a specific rate by paying a certain number of points, or even for zero points. Mortgage lenders make money in a couple of different ways. One is by charging a higher interest rate.

The higher the rate, the more money lenders make from mortgage investors who wind up purchasing your mortgage. If, however, they price their loans too high, they become less competitive in the marketplace.

The other way mortgage lenders make money is by charging fees or, in our case here, points. They offer you a lower interest rate, getting less money from the end investor but make up for the money they get in points.

So why would you ever consider paying points when taking out a mortgage? The answer is that it may save you money in the long term.

The first question you want to ask yourself is how long you plan on being in the property. The longer you will be there, the more likely the savings.

One point paid will drop your interest rate approximately one-quarter of one percent. Let’s look at a very simple example.

We’ll say that you have a $150,000 loan and you decide to pay one point ($1,500) to reduce your payment by $22 per month.

To see the payback period, your calculation would be $1,500/$22. This tells you that it would take 45 months, or just under four years, to pay back the point you paid for.

Please reach out if I can answer any questions you might have about how points work. I’m here to help, and I’m just a call or email away.

How Do Forbearances and Deferments for Mortgages Work?

Homeowners who are having challenges making their mortgage payments will often have several options to get them back on track.

First, it is best to be talking with your lender as soon as you know that you’ll be missing a mortgage payment.

Lenders really don’t want your home back and would rather work out terms with you so you can keep it. It is expensive for them to maintain a home, then go through the process of selling it, then hope they can sell it for more than you owe them.

Two of the options that lenders may offer you if you’re behind on your mortgage payments are what are called forbearances and deferments.

Forbearance: This is where the lender lets you make either reduced or no payments for a specific period of time. At the end of that period, you would be asked to catch up on all of the missed payments. Depending on the arrangement, this may be due as a lump sum at the end of the forbearance period or may be able to be paid over time.

Deferment: A deferment works similarly to a forbearance in that you’ll be able to skip a number of payments before resuming them. Here, though, you may be able to enter into an agreement with the lender to put the missed payments onto the end of the loan.

If you have any questions about asking your lender for either a forbearance or a deferment, please give me a call and I’d be happy to answer them.

Financial Steps To Take Before Buying A House

Once you feel ready to buy a house, the process usually happens fast. Whether it’s a buyers’ or a sellers’ market, you will quickly get excited about a house you see and want to jump on the chance to put an offer in. Before you begin this process, it’s vital to take a few financial steps so you’re prepared for what buying a house will look like. Not only will you feel more comfortable with the home-buying process once you have a grasp on your finances and learn about your options, this will allow you some time to save up more money or work on bettering your credit score. 

Have a grasp on your finances 

If you don’t already, start paying careful attention to all areas of your finances and be more proactive about your situation. Avoiding checking your account balance and only paying the minimum on credit cards isn’t being proactive enough when you’re preparing to buy a house. Start looking at your bank account more regularly; this will help you see just how many things you can cut costs on and how much money you can put in your savings instead of towards frivolous spending, after all, buying a house is a big financial investment.

This is also the time you want to check on the status of all of your loans, credit cards, and any other things you’re financing. At the least, make sure these accounts are in good standing, that you’ve been paying them on time for at least a year and none of your credit cards are over their limit. If possible, pay off any bills you can in total. This might not be possible for larger bills or if you’re aggressively trying to save for your future house, but if you have the extra cash this is a smart way to use it right now.

Paying off debts you have lowers your debt-to-income ratio, which is great when you’re looking to buy a house. Lenders look into your ratio to ensure that your income exceeds your current debt, this gives them a glance into your spending habits. If you have a lower debt-to-income ratio, you are less of a risk for the lender because you’re more likely to make your mortgage payment and less likely to default on the loan.

Finally, know your credit score! It’s a myth that checking your credit score can harm it, when you check your score on a website, this is considered a “soft inquiry” and does no harm to it! A “hard inquiry” is when someone like a mortgage lender checks your score, and this is when it can be affected. Therefore, you only want a lender to do this one time throughout your home-buying journey. It’s good to be informed on where you stand with all of your debts, so don’t be afraid to check that score. 

Research different loan options 

Before buying a home, you need to learn about different loan options to figure out which one is best for you. Luckily, there are many types out there to make it more accessible. Here’s a little information on different loan types so you can consider which one is best for your current financial situation:

  • Conventional loan – This loan is not backed by a government agency, like some others we will review shortly, it’s best to put at least 20% of the purchase price as a down payment so you don’t have to pay for mortgage insurance. Additionally, you usually need at least a credit score of 620. All in all, this loan is best for people who are in fantastic financial standing and who are less likely to default on the mortgage loan.
  • FHA loan – FHA loans have unique requirements because they are government-backed, this means that if you default on the loan, the lender is protected. Therefore, the financial requirements are a little looser. You can be approved for an FHA loan with only 3.5% down and a credit score of 580. This is a great option for people who haven’t been saving to buy a home or don’t have a great credit score right now.
  • USDA loan – This loan is also government-backed by the U.S. Department of Agriculture, which helps people buy homes in rural regions to encourage economic development in these areas. This will specifically help those that have average-to-low incomes for their area. If you feel like this describes you, then look into USDA loan qualifications.
  • VA loan – VA loans are another government-backed loan option but are for Veterans, Servicemembers, and their surviving spouses only. With this loan, there are competitive interest rates and no down payment or private mortgage insurance needed. If you’re a Veteran or another qualifying member, this is a great option for home buying!
  • First-time buying grants – Although this isn’t a loan and you will need one to buy, considering different grant options in your area is definitely worth it. Grants are gifts that don’t need to be repaid that can cover the cost of closing, the down payment, or even cover part of the total purchase price. You will likely have to do the heavy lifting on this because most mortgage lenders usually don’t offer the grants but it will be well worth it to try!

Shop around for lenders and rates 

To ensure you get the best interest rate on your loan, be sure to shop around for lenders. It might feel easy in this already long process to go to a friend that is a banker or go to the bank you already use. However, it’s financially smarter to shop around for quotes from different lenders to ensure you’re getting the best deal.

Interest rates can differ depending on the type of loan you decide on, based on what was discussed above you can decide which loan type is best for you. In general, people with more money down and a better credit score will benefit from a lower interest rate, because they are less risky to the lender. However, this is why it’s important to shop around for lenders because you may find an amazing one who’s willing to work with you.

Educating yourself to make the best decision possible is extremely important in this step of the home-buying journey. Be prepared by calculating what your interest rate could be before you even go to see a lender. The last thing you want is to be taken advantage of by a bank.

Regardless of if you’re a first-time homebuyer or seasoned in this area, there’s always room for improvement when it comes to your finances. Getting your financials in the best shape possible is vital before you can move forward in this journey, and you’re the only one that can do this. Next, begin to search for a realtor, lender, and lawyer that will help the rest of this process go as smoothly as possible!

What if I Have Little or No Credit History?

While credit is one important part of a total buyer profile when financing a home, there are ways, in addition to traditional credit, that you can prove to a lender that you have a positive payment history.

This is called alternative credit or nontraditional credit, and there a number of ways you can show payment history. One way you can do this (for example, if you rent) is to show cashed checks written on or before the day that the payment is due.

Other bills that you pay each month can be used in the same way. If you pay gas, electric, or monthly car insurance bills, you’ll also have a written record of your payment history. Cell phone bills work the same way.

If you are younger and just starting to build your credit history or don’t currently have any of the above items, you still have options.

There are several ways to actively build credit, especially if you are in a longer-term time frame to be purchasing a home.

One way is to start with a few smaller-type credit cards, such as from a gas station or a department store. What you can do is to use them regularly, even for small purchases, then pay them off each month.

In the eyes of the credit bureaus, the companies to whom the creditors report your payment history each month, you have consistent on-time payment history, and this is a good thing.

Another option is to look into what are called secured credit cards. This is where you give the credit card issuer the entire limit of the card when you sign up, say $500. You then basically borrow against yourself when you use the card. As you make payments, the card issuer reports your payment history to the bureaus as if it were an actual credit card.

If you have questions about any of this, please reach out. I would be happy to go over the options and help you determine what is right for you and your circumstances.