Why Does My Lender Need My Bank Statement?

When you think of tools that lenders use to determine your qualifications as a buyer, the first thing that may come to mind is a credit report.

This is an invaluable tool for lenders, since it shows patterns, and lenders are very interested in borrower patterns. They want to see trends of successful management of payments month to month. They also want to know how much debt you currently have. The credit report will provide all of this information.

Still, it doesn’t provide all the data the lender needs. Another tool they use to evaluate buyers is the bank statement. This offers a day-to-day window into how you manage your finances. The lender is specifically looking for overdrafts and proper accounting for all deposits that appear on the statement.

Overdrafts: Overdrafts, especially when there are a lot of them on a regular basis, will draw the attention of lenders. The lender will have several questions about these occurrences: Are you short of funds each month, or do you need to balance your checkbook better? How are you recovering from the overdrafts? What will keep this from happening in the future, once we lend you our money?

Deposits: All deposits on a bank statement must be accounted for. Electronic payroll deposits normally need no explanation, as the dates and amounts can be cross-checked with pay stubs. Other infrequent or large deposits will need to be explained and documented.

Lenders are looking for specific things regarding these deposits. They want to confirm steady sources of income that can be used for future mortgage payments. They also want to check for any gifts you may have received to help you secure a mortgage. If this occurs, the funds must have come from an eligible source. The lender may require a letter of explanation to confirm the legitimacy of any such gifts that show up on your bank statement.

To learn more about this process and how your bank statement affects your buying power, contact your mortgage professional.

Is There a Best Time of the Month to Close on a Home?

The answer to this question depends partly on whether you are paying off an existing mortgage at the time of closing. Let’s look at an example to illustrate this process.

In our sample scenario, you are purchasing your first home, and the closing date is set for May 10. At closing, you’ll pay interest charges from that date through the end of the month (May 31). That means you’ll pay 22 days of interest at closing. Your tax assessment will also be based on this date. Thus, the nearer to the end of the month you close, the lower your out-of-pocket charges are for this closing expense.

After closing on May 10, your first mortgage payment will be due July 1. Contained in that July payment will be interest charges for the month of June. The August payment will then cover the interest charges for the month of July, and so on. Interest charges for any given month will be paid at the beginning of the following month.

If you are refinancing or paying off an existing mortgage, the date of closing is less important. If you close on the 27th of the month, you will have a lower interest expense on the new mortgage than if you close earlier in the month, but you are still going to be paying interest on the prior loan for the first 26 days of the month.

In short, you will always be paying interest charges to one lender or another. There will never be a gap when no interest is due to anyone.

Do you have additional questions about this process? Contact your mortgage professional for more information.

Stop! Are You Really Ready to Shop?

Are you thinking about buying a home in the near future? If so, you should take one crucial step before all others: determine what you can afford.

Purchasing a home is one of the most significant transactions you’ll ever make. With this in mind, you should carefully evaluate what will work for you before you dive into the process. Even before you contact your lending professional or real estate agent, ask yourself a few key questions.

What are your needs for living space, both now and in the future? What resources will you be able to utilize for down payment and closing costs?

Beyond this, what do you realistically think you’ll be able to afford each month? What additions to your family do you anticipate, and what impact will they have on your family budget, both in terms of monthly expenses and household income?

Lastly, how much will you be able to save each month for the proverbial rainy day, in case you experience a reduction or gap in income?

Once you answer all of these questions, then you can start talking to people who are in a position to help you finance and purchase a home.

Your first stop is your mortgage professional in order to get some tangible numbers. Here, you’ll take all of the guesswork out of what you think you’ll be able to afford.

Next, with solid numbers and a preapproval in hand, you can contact a real estate agent. This agent will show you appropriate properties based on what you learned with the mortgage professional.

Buyers who don’t use this method often search for homes randomly and end up falling in love with one that is ultimately out of reach. Save yourself time and heartache by using this due process to find the perfect home for your needs and budget.

Have you carefully considered the questions listed? When you’re ready for the next step, contact your mortgage professional to get started.

Deed vs. Title: What’s the Difference?

While these terms are related, they are not one and the same. A deed is the legal document that transfers ownership of a property from one party to another. Title represents the ownership of that property (what rights a person has to it).

Titles and deeds can also take on different forms. For example, a common type of deed is a quitclaim deed.

This deed can be used in the case of a married couple who purchases a home together. If they would prefer that only one of them have ownership interest in the property, they can use a quitclaim deed. The person who will have no ownership interest uses this deed to sign away their rights to the other party. This might be done for financial or legal reasons.

If, at some point in time, a spouse needs to be added, they would use a quitclaim to make this change as well.

Regarding titles, once a person is added to a title, they may “hold title” in one of several ways. This holding refers to what legal rights each person on the title has.

A common example is “tenants by the entirety.” This is often used by married couples. In this situation, if one of the parties passes away, the other automatically becomes sole owner of the property.

There are other ways title can be held, especially for nonmarried couples. Each version gives each party specific rights as to what they are able to do with the property, both while they are alive and after they pass.

For more details on these variations, contact your mortgage professional.

Subordination Agreement – What’s That?

Subordination agreements apply to mortgage customers who have more than one mortgage on a property.

For example, if you had a mortgage on your home, then decided to get either a home equity loan or a line of credit, the new mortgage would be subordinated to the first mortgage.

In mortgage terminology, the subordination agreement would put the original mortgage in what is called first position. This means if the owner of the property defaults and the property must be sold, the lender in first position would be paid back first. The lender of the second mortgage would be paid back second, if the property sale generates enough funds.

This is why the mortgage rate on a second mortgage is often higher than the rate on the first. The second lender is taking a risk that there might not be enough funds available to pay back the loan in a default situation.

To take this a step further, if a homeowner has two mortgages and wants to refinance just the first mortgage, the homeowner would have to get a new subordination agreement signed by the original second lender before doing so.

This is to keep the second mortgage in second position. Otherwise, the once-in-second-position mortgage would move to first position, and no first mortgage lender would ever allow themselves to become subordinated under a second mortgage.

If you have additional questions about this agreement or the process for obtaining a second mortgage, contact your mortgage professional for details.

Help! There’s a Mistake on My Credit Report!

It’s a good rule of thumb to check your credit report regularly, even if you’re not currently applying for a mortgage or any other type of credit.

Why? If the report contains incorrect information, it’s better to know sooner than later, especially if you do plan to apply for credit at some point. This will give you time to correct the error before it affects a transaction.

If you discover a mistake, you can approach correcting it in one of two ways.

The first and most basic approach is to contact, in writing, the credit bureau that reported the information you believe to be incorrect. The three primary credit bureaus are Experian, Equifax, and TransUnion.

Send each of these reporting bureaus a certified letter, providing as much detail as you can, including account numbers as they appear on the credit report, all relevant dates, and why you think that the information is incorrect. There are online resources to assist with drafting this letter.

The bureaus will then go to the agency that provided the information to get details of what happened. If that agency is unable to provide documentation that the debt is legitimate, it then must come off the report.

Keep in mind that the credit bureaus are not required to remove legitimate negative data from a credit report.

The second option is to go to a credit repair agency, which will do some of this work for you. However, keep in mind that these agencies charge a fee. They may also take longer to get back to you than if you did it yourself, since they will be servicing multiple clients who each demand part of their time.

If you decide to go this route, check out whomever you want to use. As with any other type of service you are shopping for, check the company’s status with the Better Business Bureau.

Additionally, your mortgage professional may have referral partners in the credit repair business to whom they can refer you. Contact this expert for more details.

What Costs Can I Expect When Buying a Home?

You know the purchase price of the property, but what other costs might be required in order to make that home your own?

If you plan to finance your purchase, you can expect the following costs during the transaction or at the closing table.

Lender Fees. You pay these fees directly to your lender to process your loan. They include origination fees and processing fees. If you are taking out an FHA loan, you also have to pay an upfront mortgage insurance premium. Though this loan is financeable, you also have the option of paying out of pocket at closing.

Third-Party Fees. These fees are paid directly to people and organizations outside of the mortgage company who perform the necessary tasks to close your loan. These include appraisers, surveyors, and title companies.

Attorney fees are another example of common third-party fees. Some states require that attorneys be present and review documents at closing. Even if this isn’t a requirement in your state, it’s a good idea to hire a real estate attorney when purchasing a home.

The same holds true for a home inspection. While you aren’t required to get one, it’s always a good idea to do so. In most real estate contracts, you will be given a window of opportunity to have an inspection completed. Take this opportunity. Paying for this, along with having an attorney on your home-buying team, could well be the smartest money you spend in the transaction.

Reserves. Your lender may require you to put money into what is called an “escrow account.” This account is funded both at closing and each month as part of your mortgage payment. Your mortgage servicer (which may also be your lender) will pay out recurring expenses such as property taxes and homeowner’s insurance from this account when they become due. This is one way that the lender protects itself from losses.

To get an idea of exact costs in your area, or for a specific price range, contact your mortgage professional.

Why Lining Up Financing Is the Home Buyer’s #1 Job

Talking to a mortgage professional before you start looking for a home, even if you are just thinking about looking for a home, is a good idea. Why?

Your best strategy for going into the home purchase process is to get yourself in a ready-to-buy position. This is especially true as interest rates continue to rise.

You may have checked your credit score and discovered that it is great, but there is still more to the story, such as income and assets. It’s important to be on top of all aspects of your credit.

For example, you may be timely in making all the payments on your debt each month, but your lender may recommend that you pay down or pay off some of the debt to improve your debt ratios. This may take time, and the sooner you know what needs to be done, the sooner you’ll be able to start taking care of it.

This process is also important for setting your search parameters. The last thing you want to do during the home purchase process is guess what you think you can afford and get your hopes up on a property that may be a little (or a lot) out of reach.

Another variable to consider is your real estate agent. If you plan to work with one, he or she will want to see some type of pre-qualification letter. This lets the agent know you have the means to purchase a home and in what price range he or she should help you look.

Are you ready to start home shopping?

To get started on this preapproval process, contact your mortgage professional.

What Is a USDA Mortgage?

A USDA loan, also known as a Rural Housing Loan, is a mortgage that is guaranteed by the United States Department of Agriculture (USDA).

It is primarily used for the purchase of homes in less densely populated areas, but it may also be used in some suburban areas. USDA guidelines define specific areas where the agency will lend money.

The process of obtaining a USDA loan is similar to what you might expect with a Federal Housing Administration (FHA) loan. USDA mortgages allow you to obtain a true zero percent down payment loan, whereas FHA requires a minimum 3.5 percent down payment. The only other traditional zero percent down payment loan that exists right now is the VA loan.

As with the FHA, the USDA requires mortgage insurance. This is to help offset some of the costs the department incurs for loans that are not paid back.

There are two components to this insurance. There is a one-time, upfront fee that is 1.0 percent of the loan amount. This fee can be financed.

The other portion is a monthly mortgage insurance premium charged at a rate of 0.35 percent of the loan balance per year. On a $150,000 loan, this would be roughly $44 per month, but this will decrease over time as the loan balance depletes.

Keep in mind that zero percent down doesn’t necessarily mean $0 out of pocket. Unless they are covered by a seller credit or gift, closing costs still need to be paid at closing.

As far as income, your eligibility is determined by how much you make in relation to the median income of the area in which you are buying. Currently, you must make no more than 115 percent of that median income to qualify for USDA financing.

As with any type of financing, your credit profile is also a factor in qualifying. For a USDA mortgage, if your score is under 640, you may be asked to provide extra documentation.

To determine whether a USDA loan might be a good option for you, contact your mortgage professional.

Prepayment Penalties: Are They a Concern?

A prepayment penalty is a fee that is imposed if a mortgage is paid off or paid down by a certain percentage within a certain time frame in the life of that mortgage.

You may be wondering whether your current mortgage has one. Chances are that it does not. If your mortgage terms included a prepayment penalty, by law, you would have had to sign a disclosure stating that you were aware of the penalty and its terms.

Per the Dodd-Frank Act, effective July 21, 2010, prepayment penalties became illegal on most residential mortgages, so this is far less common than it used to be. However, certain types of mortgages may still have them.

The original purpose of the prepayment penalty was to protect the lender from people who frequently refinanced when rates fluctuated greatly in a short period of time. It’s also designed to protect the lender’s income. It is expensive for lenders if you either pay off or significantly pay down your loan early, since the income they earn from loans typically includes payment streams over time. This is especially true if they are servicing your loan (taking the payments, paying out the taxes, and paying insurance).

Still, in order to incur a penalty, buyers would usually have to pay off a significant portion of the loan very quickly. A typical example is to pay 20 percent of the loan in one year. On a $100,000 loan, this would require paying down $20,000 in 12 months. A homeowner paying even $1,000 per month extra on the principal would fall well short of reaching that point.

In other words, you’re probably free of any worries about prepayment penalties.