Category: Perspectives

Perspectives

Mortgage Refinance 101: when to refinance and why?

Refinancing a mortgage can potentially be a great financial strategy, especially when the original mortgage was purchased at relatively unfavorable terms.

However, there are definite costs associated with pursuing a refinance transaction, which is why its important to understand when to refinance and why. In this STEM Lending post, we cover why you should consider refinancing the mortgage and if so, when is a good time to refinance.

So lets cover the basics: what really is refinancing a mortgage? Refinancing refers to replacing an existing mortgage with another mortgage under different terms. In US, refinancing terms may vary based on economic factors, including projected risk and borrower’s credit worthiness. Usually refinancing is done for borrower’s primary residency mortgage.

Interest rates are currently close to all-time low (see figure below on Average US 30-year Fixed Mortgage rates), therefore mortgage refinancing remains a good option for many homeowners, especially if you bought your mortgage before the 2008 financial crisis:

Refinancing programs in United States

There are several mortgage refinance programs available in the United States, including:

  • Adjustable Rate Mortgage (ARM): You may chose to refinance to an adjustable rate mortgage if you project interest rates may go down in the future. As we highlighted earlier, current interest rates are already at historic lows so substantial future reduction in interest rates is unlikely.
  • Fixed Rate Mortgage: By refinancing to a fixed-rate mortgage can help you plan for monthly mortgage payments well in advance thereby helping you set a budget with predicable cash flows.
  • Cash Out Refinance: Using cash-out refinancing, you can convert part of your home equity into cash, which can be used for expenses such as home repairs
  • HARP: Federal Housing Finance Agency’s Home Affordable Refinance Program helping home-owners experiencing significant drop in their home values refinance with better mortgage terms.
  • FHA Streamline: refinancing existing FHA-insured mortgages requiring limited borrower credit documentation and underwriting.
  • USDA Streamlined Assist Program: available to existing USDA home loan borrowers, by US Department of Agriculture (USDA), providing more affordable refinance payment terms to borrowers with low or no equity.
  • VA Cash-Out Refinance Loans: providing qualified veterans an opportunity to withdraw cash for a near term need from their existing conventional or VA loan.

Two important factors to keep in mind regarding refinance are: (i) Refinancing resets the clock on your mortgage, so a fresh 30-year refinance on an existing 30-year mortgage will extend the mortgage duration to a fresh 30-year duration from the day of refinancing closure, although at a potentially lower interest rate and monthly payment. (ii) There are transaction costs associated with accomplishing a refinance, including a concept of points as we discuss below. Even with mortgage clock reset and transaction costs, refinancing can potentially be a valuable financial decision, for following reasons:

Motivation for refinance

Mortgages can be refinanced for multiple reasons:

  1. Reducing monthly payments by lowering the interest rate.
  2. Debt consolidation of multiple mortgages into one for a potentially different term based on prevailing interest rates.
  3. To reduce the risk of rate fluctuation, switching from an adjustable rate mortgage to a fixed-rate mortgage.
  4. To make cash accessible by altering the terms of mortgage (cash-out refinancing).

Also note that there can be potential tax benefits available with refinancing, particularly if the borrower doesn’t owe the Alternative Minimum Tax.

How do you proceed with refinancing? We recommend you to reach out to a licensed professional mortgage broker who can help discuss your mortgage options and guide you whether you will benefit from a mortgage refinance.

To explore your refinancing options with STEM Lending in more detail, we encourage you to reach out to contact@stemlending.com or contact us via stemlending.com/contact-us / +1-833-600-0490 (toll free), if you have any questions regarding refinancing. We offer free initial consultation to discuss your mortgage options. We also offer a number of handy mortgage calculators to help you compute the mortgage monthly payments and other analytics.

Mortgage Points

A fraction of the net mortgage value is often required to be paid upfront for refinancing. Usually, this fraction is expressed as percentage of  the mortgage amount and is referred to as points, i.e. 1 point equates to 1% of total mortgage amount. Larger upfront payments for refinance (i.e. larger number of points) often yield reduction in interest rates in the refinanced loan.

For further information, feel free to contact us:

  1. stemlending.com/contact-us
  2. Mortgage Calculators – Essential for financial planning

Wishing you a happy home buying experience!

– STEM Lending Team

Perspectives

Unexpected Costs for First Time Homebuyers

How to Keep New Homeowner Costs in Check

Buying your first home is an exciting and breathtaking experience. However, as you become a new homeowner you’re focused on closing and moving into their home with no hassles, it’s easy to be naive about the unexpected costs involved in being a homeowner.

Some of the unexpected costs are unavoidable, such as closing costs. Other costs may depend on where you live, the kind of home you purchased, and your lifestyle choices. Additionally, most people are unprepared for any unexpected repairs that come up just as you’re moving in.

At STEM Lending, we are committed to helping you understand the full picture of what your true costs of owning a home are. Read below to learn more about unexpected costs that can arise when buying a home.

Property Taxes

A common mistake homebuyers make is to find a dream house, plug in the principal and interest rate payments into their calculator, and use that number (ex. $2,000) to compare vs. their current rent. This calculation is incorrect as it leaves out a major expense — property taxes!

Find out what your expected property taxes are by checking the MLS (Multiple Listing Service), divide it by 12 and then add that to your estimated monthly payment.

Buyers are typically required to pay for three months’ worth of city & county property taxes at closing. You may also have a choice of rolling your monthly mortgage payment + monthly property tax bill into one lump payment, but this not required in every location.

Be aware that property taxes (just like HOA fees) always go up — sometimes by 1-3% per year, so make sure you’ve saved enough for a cushion for any unforeseen tax increases.

Closing Costs

As we’ve mentioned in previous blog posts, closing costs can be a very unpleasant experience, especially if you are surprised at the last minute. Between January 2016 – January 2017, ClosingCorp, surveyed 1,000 first-time and repeat homebuyers to gauge their biggest surprises.  Here were some of the findings:

  • 17% of all homebuyers were surprised closing costs were even required
  • 35% of all homebuyers were surprised that their closing costs were higher than expected
  • 24% of all homebuyers were surprised by unexpected costs regarding mortgage insurance

Educating yourself on the specific state requirements for closing costs is key. Some states allow the seller to pay some or most of the closing costs, but to be on the safe side, budget for 2-3% of your home’s value to be paid at closing.

Home Maintenance

As a new homeowner, all of the landscaping, lawn-care, and maintenance is now all on your budget. If you’re a first time homeowner, you probably have never had to be responsible for a lawn or the grass on the other side of the sidewalks. You will need to budget additional funds to buy home maintenance tools such as a lawnmower, shovels, and rakes.  If you live in a colder climate, you may need to purchase a snowblower to help plow the snow in a big snowstorm.

Overall, plan on spending 1 to 2% of your home’s value every year in maintenance and upkeep, according to the Harvard University Joint Center on Housing Studies.

Furniture

One of the largest triggers for a family to move away from large city apartments to single-family residences is the need for space. If you and your spouse have just had a second child, or are thinking of expanding your family, you’ll likely be moving to a much larger house. This means that you will likely have to buy more furniture to make your house a home.

There are ways to reduce your expenses by buying furniture from your friend’s parents (who may be downsizing) or by shopping estate sales. You can also space out your furniture purchases over months. Given how expensive items such as beds, couches, and dining tables can be, consider what your total expenditure on furniture based on the square footage of the house.

Utilities

As a current homeowner, believe me when I say: your utilities costs can be as high a number as your property taxes. The seasonality of these bills is a big factor in how they appear as an unexpected cost. Additionally, if you were previously a renter, depending on the state where you lived, you may or may not have had to pay for heat or hot-water.

In the U.S., energy costs account for 5 – 22% of families’ total after-tax income, according to a national study. Although climate and location plays a significant role in consumption, the age of the housing stock also plays a role.

Estimates for annual utility bills change with climate, and the national average is ~$3,000. Ask a parent, co-worker, or friend with a home in the same county you’re considering, and go over their most recent utility bill. This kind of real world comparison is very helpful when it comes to considering unexpected costs in home maintenance.

Kids

This may come as a surprise, but kids (young children) can be difficult to keep track of in your new house! They are the biggest joy in your life, but…they can also put holes in walls, draw on walls, and spill all types of juices on carpets and rugs. Kids who’ve just learned to walk could run into a screen door, or throw a toy that breaks a window.

When you were a renter, your biggest fear was losing your security deposit due to damage to the unit. Now that you’re an owner, the costs can be hundreds, if not thousands of dollars more.

Setting aside even a few hundred dollars for accidental damages from children can be a useful war chest as your family grows.

 

Perspectives

Mortgage Calculators – Essential for Financial Planning

Mortgage calculators enable us to measure how changes in mortgage terms will impact our future financial outlook. They form an essential tool during the mortgage process, helping homebuyers identify the best terms for their mortgage. Lets get familiar with them.

Key factors in mortgage calculations include:

  • Mortgage Principal
  • Loan Balance
  • Compound Interest Rate
  • Number of Payments per Year
  • Total Number of Payments; and
  • Regular payment amount

STEM Lending Mortgage Calculators

We at STEM Lending offer a number of mortgage calculators for your ready use. Check these:

Further advanced mortgage calculators incorporate other costs associated with a mortgage, including insurance and such as local/state taxes.

Fixed Rate Mortgage Calculators

Monthly payments for a fixed rate mortgage are the amount paid by the borrower every month that ensures that the loan is paid off in full with interest at the end of its term.¹With a fixed rate mortgage, the borrower agrees to pay off the loan completely at the end of the loan’s term, so the amount owed at month N must be zero. The monthly payment formula is based on the annuity formula, depending on:

  • The monthly interest rate, expressed as a decimal, not a percentage. Since the quoted yearly percentage rate is not a compounded rate, the monthly percentage rate is simply the yearly percentage rate divided by 12; dividing the monthly percentage rate by 100 gives r, the monthly rate expressed as a decimal.
  • The number of monthly payments, called the loan’s term, and
  • The amount borrowed, known as the loan’s principal.

The fraction of the monthly payment that is applied to principal pay down equals the amount of payment minus the amount of interest currently paid on the pre-existing unpaid principal.¹

The interest component of the monthly payment, is the interest rate times the amount unpaid at the end of month. Since in the early years of the mortgage the unpaid principal is still large, so are the interest payments on it. The portion of the monthly payment going toward paying down the principal is very small and equity in the property accumulates very slowly (in the absence of changes in the market value of the property). But in the later years of the mortgage, when the principal has already been substantially paid down and not much monthly interest needs to be paid, most of the monthly payment goes toward repayment of the principal, and the remaining principal declines rapidly.

The borrower’s equity in the property equals the current market value of the property minus the amount owed.

Adjustable Rate Mortgage Calculators

Annual percentage rates (APR) calculations for Adjustable Rate Mortgages (ARMs) require many more variables, including: the starting interest rate; the length of time at that rate; the recast; the payment change; the index; the margins; the periodic interest change cap; the payment cap; lifetime cap; the negative amortization cap; and others.¹

In the forthcoming STEM Lending blog posts, we will dive deeper into these steps and the gotchas that you need to watch out for. Please feel free to reach out to contact@stemlending.com or contact us via stemlending.com/contact-us if you have any questions.

Wishing you a happy home buying experience!

– STEM Lending Team

References

  1. Mortgage Calculator
  2. Payment / Amortization Calculator: Showing your monthly payment for fixed rate or adjustable rate loans.
  3. Rent vs. Own Calculator: Comparing the estimated costs of buying vs. renting a home.
  4. Annual Percentage Rate (APR) Calculator: Calculating the annual percentage rate for a loan.
  5. Debt Consolidation Calculator: Calculating the effect of combining other debt with your home mortgage.
  6. Prepayment Savings Calculator: Estimating how additional mortgage payments reduces your interest costs.
  7. Early Payoff Calculator: Computing the additional payment required to pay off your loan early.
  8. Refinance Break-Even Point Calculator: Calculating the number of months to break-even if you refinance.
  9. Tax Savings Calculator: Estimating your early tax savings resulting from property.
Perspectives

Learning basics of mortgages can help you save

Owning a home is a dream of many Millennials throughout the United States. However, with the ever increasing cost of education and ballooning student debt, homeownership often begins with seeking a substantial mortgage.

When it comes to mortgage, making uninformed financial decisions can not significantly harm our financial future, it can even lead to bankruptcy and foreclosure of our homes.

While the world of mortgage may seem mystical and daunting at first, mortgage-focused information and products are readily available on the Internet. It empowers us to become familiar with basics of how mortgage works, well before we apply for one. With this motivation, we will publish a series of articles helping prospective homebuyers navigate the entire mortgage process.

First, lets learn the basics. Broadly, the mortgage process involves:

  1. Loan Application
  2. Home Inspection
  3. Home Appraisal
  4. Home Insurance
  5. Title Search
  6. Rate Lock-in
  7. Mortgage Terms Review
  8. Down-payment
  9. Closing Costs Payment
  10. Review Closing Documents

Loan Application

With the help of mortgage brokers or lenders, home buyers fills in a Uniform Residential Loan Application, which specifies the following pieces of information required for reviewing the mortgage application: the type of mortgage, terms of loan, property information, purpose of loan, borrower/co-borrower information, employment information, monthly income and combined housing expense information, assets & liabilities; details of transactions; and certain required and optional disclosures. Once the loan application is received by the lender, the subsequent steps in the process outlined above ensues.

If any element of the loan application was inadequately filled, the lender may ask clarifying questions to complete all the required fields in the mortgage application.

Home Inspection

Home inspections are non-invasive examinations of structural conditions of a home. The inspection may include any combination of mechanical, structural, electrical, plumbing, or other essential systems or portions of the home, as identified and agreed, prior to or during the inspection process.

As home inspections are based on visual observations, they only reveal material defects observed on the day of the inspection and not all material problems that have existed in the past. They help home buyers in identifying material defects in a property that can potentially have an unreasonable risk to residents. Notably, home inspection is different from home appraisal as a home inspector determines the condition of it’s structure, whereas an appraiser determines the value of the property(see below).

Home Appraisal

A home appraisal is an unbiased professional valuation of a home’s fair market value. Lenders order an appraisal during mortgage application to ensure that the loan amount requested by the borrower is based on home’s fair market value. A fair estimate of home’s value is important because in the event of a borrower’s default, the lender may need to foreclose and sell the property in the market.

Home Insurance

Mortgage lenders typically require that home buyers purchases home insurance in order to protect the lender if the home is destroyed. Certain perils may or may not be covered as a part of the home insurance policy, including fire, lightning, windstorm or hail, explosion, smoke, vandalism, aircraft or vehicle collision, riot or civil commotion. Notably, flood insurance and other calamities are often not included in home insurance plan, and its important to give due attention to whether buying flood insurance or other will be valuable.

Title Search

A home’s title search is the process of retrieving documents evidencing events in the history of that home’s sale. The goal of title search is to ensure that the person selling the home has the right to sell it and that the home buyer is getting all property rights.

Rate Lock-in

In the rate lock-in step, the borrower locks in the mortgage interest rate with the lender. This step happens no later than 10 days prior to the mortgage closing date.

Mortgage Terms Review

The borrower reviews the terms of the mortgage presented by the lender, to ensure all terms and documents concerning the mortgage are in order. This step happens once the home inspection, home appraisal and title search are completed with no discrepancies observed and the mortgage is approved by the lender. If there are any issues observed during the title search/home inspection/home appraisal, they need to be resolved before the mortgage gets approved.

Down Payment

Once the mortgage is approved and the borrower has reviewed mortgage terms, the borrower will need to deposit the down payment with the lender, which is usually done via wire transfer or cashier’s checks.

Closing Costs Payment

Closing costs are the fees associated with home purchase that are paid by home buyers at the closing of the mortgage transaction. Note that Closing refers to the point in time when the property’s title is transferred from the seller to home buyer.

Closing costs usually have a multitude of fees and they are incurred by either the buyer or seller, so its important to get fully familiar with them beforehand and identify which. They may include:

Attorney Fees; Title Service Costs; Recording Cost; Document/Transaction Stamps or Taxes; Survey Fee; Brokerage Commissions; Mortgage Application Fees; Points; Appraisal Fees; Inspection Fees; Home Warranties; Private Mortgage Insurance; Pre-paid Homeowner’s Property Insurance; Pro-rata property taxes; Pro-rata property taxes; Pro-rata Homeowner Association Dues and others.

Review Closing Documents

In the review step, homeowners review all the documents associated with closing and fulfill homeownership.

In the forthcoming STEM Lending blog posts, we will dive deeper into these steps and the gotchas that you need to watch out for. Please feel free to reach out to contact@stemlending.com or contact us via stemlending.com/contact-us if you have any questions.

Wishing you a happy home buying experience!

– STEM Lending Team

For further information, see these references:

co-borrowers Perspectives

Should I Add a Co-Borrower to my Mortgage Application?

Getting approved for a mortgage loan is the first step toward the milestone of becoming a homeowner. It is also the beginning of a serious, long-term financial commitment. For many first-time homebuyers, getting approved on your individual finances or as a co-borrower is a difficult decision.

According to data analysis released by Zillow, 70% of prospective home-buyers frequently search for a home with their spouse or partner.

But when you are actually applying for the mortgage, should you & your spouse both apply as co-borrowers? Or, should you try qualifying for the mortgage on your own?

Education continues to be a distinguishing factor in the first-time homebuyer decision making process, so let’s start there.

Mortgage Definitions

Co-borrowing vs. Co-signing

It’s important to understand the differences between a Co-signer and a Co-borrower. Remember, if you have any additional questions, you can always call STEM Lending, and we will connect you with a mortgage specialist.

Co-Borrower: this is someone whose name is on loan documents along with yours. Both people are equally responsible to repay the loan in this situation. Taking both the primary and co-borrower’s income, assets and creditworthiness into consideration for the loan application may help qualify for a mortgage loan with better rates.

The co-borrower has what is called an “ownership interest” in the home or condominium you are looking to purchase. Co-borrowers take title to the property and are obligated on the mortgage note and must also sign the security instrument. The co-borrower’s income, assets, liabilities, and credit history are considered in determining creditworthiness.

Co-Signer: a Co-signer is a person whose assets, income and creditworthiness are taken into consideration to help qualify you for a mortgage. Co-signers are liable to repay the loan, but they have no ownership interest in the house.

Co-borrowers

Obviously, having someone with a substantial credit history (ex. a parent, grand-parent, uncle, aunt) co-sign on the home loan can help you get a mortgage with the best interest rates. The benefit for the co-signer (aside from helping you buy your house) is that the regular monthly payments made by the homeowner reflects well on his/her credit report.

Co-signers are liable for repaying the mortgage obligation and must sign all documents with the exception of the security instruments. The co-signers income, assets, liabilities, and credit history are considered in determining creditworthiness for the mortgage and the co-signer must complete and sign the loan application.

As you can see, the downside of co-signing a mortgage loan is the risk of default. If you (homeowner / occupier) cannot afford to make monthly payments, your co-signer is liable to repay the loan. This is an extremely important point for all parties to understand upfront.

Non-Occupant Co-Borrower

There is a third, but less known option — the “non-occupant co-borrower.”

A non-occupant co-borrower is a person who is co-borrowing on a home, but not living in it. Non-occupant co-borrowers are a step above co-signers — they’re “partners” in the home’s ownership. This person may be added to a mortgage loan to help you qualify for a mortgage. A non-occupying co-borrower is beneficial from an income or credit perspective.

Some lenders who allow non-occupant co-borrowers, such as Fannie Mae (HomeReady) and Freddie Mac and some conventional home lenders, require a non-occupant borrower to be a relative of the person who will be residing in the home. The non-occupant borrower must be related to you by blood, marriage or law to qualify as a co-borrower who will not reside in the home. FHA loan programs allow non-occupant co-borrowers for home buyers who have little or no income for income qualification so they can meet the necessary debt to income ratios.

As a non-occupant co-borrower, you get the same notices as the borrower so you know if they’re not paying on time; and, you put yourself in position to force a home sale if the primary borrower is not fulfilling their duties to your arrangement.

When you apply for your mortgage, just tell the lender that you’ll be using a non-occupant co-borrower on the loan. Your lender will know what to do.

Fact vs. Fiction

Many non-homeowners think that if they are married, applying for a mortgage as co-borrowers is a requirement: 

Applying for a mortgage as Co-Borrowers is NOT a requirement.

Another commonly held belief is that, by bringing a Co-borrower onto your loan application, you will always improve your chances of being approved.

However, it is crucial to understand that the federal agencies (Fannie Mae, Freddie Mac, Ginnie Mae) that oversee and buy loans from lenders will generally require lenders to use the lower scoring borrower’s credit score (specifically, the median score from  Experian, Equifax, or TransUnion credit reports) to underwrite the loan.

So, even if your co-borrower’s credit is well established and 780, if you have poor credit, it’s very possible that your co-borrower’s credit won’t help you in determining creditworthiness.

What’s the Right Move?

Ultimately, adding a co-borrower to your mortgage loan application will result in having your income history, assets, liabilities, and credit assessed for eligibility and creditworthiness. The interest rate you both are quoted and your overall eligibility will be influenced by each other’s personal financial history, so it’s always a good idea to strengthen your credit as much as possible before applying.

Since you will both have equal responsibility to repay the loan, if you choose to bring on a co-borrower or co-signer, make sure you understand the legal differences. Additionally, given that many co-borrowers are related or spouses, you should discuss what will transpire if things go south (e.g. divorce, sudden death, job transfer, etc…)

Again, for more information on your specific situation, shoot us an email at support@stemlending.com or visit www.stemlending.com for more details.

Perspectives

Proactively monitor credit report before seeking mortgage

Millennials looking for a mortgage to fulfill their dream of homeownership may be in for a surprise when lenders fetch their credit report.

With recent data breaches at Equifax, large e-commerce merchants, e-mail providers and many others there’s constant threat of hackers gaining access to our digital identity. They can potentially masquerade our profile to make fraudulent transactions online and offline. Missing payments on these fraudulent transactions can significantly lower your credit score and thus have far reaching consequences on your dream of homeownership.

It is imperative to constantly protect our online identity and credit profile, especially so for mortgage seekers. So how do you go about identity theft protection? Consumer Financial Protection Bureau has created a valuable page on this, which we highly recommend you check out: Identity theft protection following the Equifax data breach. To summarize, some signs of identity theft to watch out for include:

  • Accounts on your credit reports that you didn’t open.
  • Incorrect personal information on your credit reports.
  • Credit inquiries from companies you’ve never contacted.
  • Wrong amounts showing on your accounts in your credit reports.
  • Money missing from your bank account.
  • Bills that you used to get are no longer being delivered to you.

Also, there are options available to consumers to proactively monitor credit report, including using credit alerting services, which generate alerts whenever someone attempts to obtain credit using your identity. Credit Alerting services are offered by each of the three major credit bureaus: Experian, Equifax and TransUnion. You may also consider placing a Credit Freeze on your account at each of the three major credit bureaus.Visit Federal Trade Commission (FTC)  Frequently Asked Questions resource for information on how you can place and lift a Credit Freeze. Placing a Credit Freeze will block anyone attempting to access your credit profile from each of the the credit bureaus unless the Credit Freeze is lifted. Lifting a credit freeze will require a secure PIN, thereby protecting your identity. One excerpt from FTC FAQs to note is regarding the difference between a credit freeze and a fraud alert:

“A credit freeze locks down your credit. A fraud alert allows creditors to get a copy of your credit report as long as they take steps to verify your identity. For example, if you provide a telephone number, the business must call you to verify whether you are the person making the credit request. Fraud alerts may be effective at stopping someone from opening new credit accounts in your name, but they may not prevent the misuse of your existing accounts. You still need to monitor all bank, credit card and insurance statements for fraudulent transactions.”

To underscore, owning a home is a long standing dream of many Millennials. To make that dream a reality, accessible and affordable credit is often the key. An intentional and proactive approach for monitoring credit is therefore essential to ensure you get access to the mortgage and fulfill that dream.

For more insights on mortgage credit for buying your dream home, connect with STEM Lending team:

Perspectives

Closing Costs Explained – Five Categories You Can’t Miss

You’ve found your dream home, have completed the mortgage approval process, and are reviewing the list of your closing costs.

Suddenly, you feel as though you are seeing some fees for the first time. Some services listed may sound odd. And there’s a lot of mortgage language you may not understand.

By working with STEM Lending, we can help you understand all of these fees, and how to reduce or eliminate them.

Before we dive into specific Q&A, most of your mortgage closing costs can be broken down into 5 categories:

  1. Lender Fees
  2. Third-Party Fees
  3. Prepaid Fees
  4. Closing Date Changes (interest accrual)
  5. Escrow Account Pre-Funding (property taxes, insurance)

With respect to the 5 categories, here are the important takeaways:

  • Lender fees encompass all items the lender utilizes in order to process, approve (or decline) and fund your mortgage loan. These include underwriting your application, recording your mortgage with the government, and any origination fees (see below for more detail on origination fees).
  • Third-party fees involve items related to actually processing your mortgage loan. Items like title insurance, mortgage insurance, flood certification, transfer taxes, and appraisals fall within third-party fees.
  • Pre-paid Fees relate to two items specifically that you must have pre-funded or prepaid prior to closing: (1) homeowners’ insurance, and (2) interest accrual on your mortgage loan.
  • Closing Date Changes: the interest accrual piece is complicated, so we wanted to break it out within the broader context of your closing date.  When you close on your mortgage, you are required to pay the accrued interest from the date you close through the end of that month. The CFPB describes interest accrual as “charges due at closing for any daily interest that accrues on your loan between the date you close on your mortgage loan and the period covered by your first monthly mortgage payment.” See here for more information.
  • Escrow Fees are the dollar amounts generally required by lenders when starting your new escrow account. These accounts are setup to pay your quarterly property taxes, and your monthly homeowners insurance. Not all lenders require you to escrow property taxes with them, but the benefits of doing so may include a lower interest rate plus the added benefit of centralizing all your home-related expenses into one simple payment.

Take a look below at three different potential scenarios that could happen to you as you evaluate mortgage costs (source: CFPB).
CFPB guide for different mortgage loan scenarios
Even after reading through this short walk-through of fees you are likely to encounter at closing, you may still have questions.

To help narrow any gap between your current mortgage knowledge & the information you need to have to close on your mortgage with confidence, we’ve taken a stab at a short Q&A below:

 

Q: What is a Mortgage Loan Origination Fee?

A: A: The mortgage origination fee is an upfront fee charged by the lender for processing. It’s a percentage of the loan amount — often about 1 percent. An underwriting fee is charged by lenders to analyze a mortgage application, calculating the riskiness of the loan.

They are typically broken down into something called “mortgage points.” These points are expressed as a percentage of the loan amount.  So if the loan amount is $100,000, and you see a $1,000 loan origination fee on the paperwork, the bank or broker is charging you one 1 mortgage point.

To be clear, the “loan origination fee” is paid to the loan officer or broker who initiates and completes the loan transaction with the borrower, and is only paid out if and when the loan funds.  This fee is the originator’s commission for helping you get your mortgage loan.

All fees should be completely & transparently disclosed on the Good Faith Estimate (GFE) and the “HUD-1” settlement statement. Pay close attention to this figure to see exactly what you’re being charged, whether paid out-of-pocket or via a higher-than-market interest rate. Most upfront banks and brokers will charge 1-2% of the loan amount, although this can vary.

You should always compare closing costs, origination charges, lender fees, AND your interest rate between different banks and lenders to get the complete picture. We believe in transparency at STEM Lending, and will help you find the best mortgage for you, regardless of lender or product.

Q: What is a Tax Monitoring Fee? What is a ‘Tax Status Research Fee? 

A: The tax service fee covers the cost of hiring a company that will monitor your property taxes to verify the amount due each year and make sure the taxes are paid on time. Most lenders require that borrowers pre-fund their property taxes in escrow

Q: What are these ‘Escrow Fees’? Is that the same thing as the money I put into Escrow?

A: Great question. Don’t make the mistake of confusing escrow fees with money held in escrow. Some states charge an escrow fee or a closing fee. This is paid to the title company, escrow company or attorney for conducting the closing. Regardless of where the title company or escrow company oversees the closing, they both act as an independent party in your home purchase. Some states require a real estate attorney be present at every closing.

Q: What is the ‘Delivery Fee’ or ‘Courier Fee’?

A: Sometimes you will see an itemized fee for courier or delivery, or a cost for transporting documents. These costs should be relatively small, so be on the lookout for any unusually large fees.

Q: What is the ‘Recording Fee’?

A: As we mentioned above, this fee relates to recording your mortgage with the local government. The fee is charged by your local recording office, for the recording of public land records.

Q: What is the ‘Survey Fee’?

A: While not required by all states, the survey fee goes to a survey company to verify that the property lines for your home match what is on file, and for documenting things like shared fences on the property.

Q: STEM Lending helped me get my loan and I closed. What happens next?

A: As soon as one of STEM Lending‘s lending partners makes the loan it will be sold. That lender may have sold the loan before closing, sold the loan at closing, or will sell the loan after closing.  Depending on which of these actions occurred will determine whether the lender acted as a Mortgage Broker or a Mortgage Lender for your specific transaction.

Q: Do the lenders have to notify me when they sell/transfer my loan? If so, When?

A: Whenever your loan is transferred you are required to be notified within 15 days. Loans being transferred after origination is very common so don’t panic if you receive a notice saying your loan is being transferred. The “mortgage servicer” is the company who manages customer service & billing for your mortgage loan. The terms of your loan that you closed under will not change; what will change is that you will now make your monthly payment to a new institution.

Q: You’re saying that mortgage loans are sold after closing all the time? So, does it matter where I get my loan?

A: Whether you get your mortgage through a mortgage broker, lender, or mortgage banker, everyone will compete for your business. At STEM Lending, we compete by offering you unparalleled transparency, simplicity, and speed. Most conventional fixed rate mortgages and even adjustable rate mortgage (ARM) loans are ultimately sold to one of the GSEs (Fannie Mae or Freddie Mac). However, who you choose as your initial point of contact for getting your mortgage makes a huge difference. Mortgage Bankers and Brokers deal with multiple lenders so the consumer is exposed to a wider range of products and rates, resulting in more transparency and more choice for our customers.

To recap, closing costs are involved, and the last thing you want to do is become a mortgage expert, days before closing on your first home.

Our goal is to help arm you with only the relevant information you need to understand all of the fees and costs your hard-earned money is going toward as you close on your home.

Please reach out to us with any questions at support@stemlending.com

Perspectives

Explaining Debt-to-Income “DTI” and Its Importance

When mortgage lenders approve borrowers for a loan who have completed applications on STEM Lending’s site, that decision is based on a standard set of guidelines that are generally determined by the type of loan program. Today, we are going to focus on one of the main components of a mortgage approval: Debt-to-Income (DTI) Ratios.

Many potential home buyers have only a rough idea before applying — even for a pre-approval letter — about their own DTIs, how lenders view them, and what sort of obstacles they’re likely to encounter.

How Do I Calculate DTI?

Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income.  This number (reflected as a %) is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.

The lower the DTI ratio a borrower has (more income in relation to monthly credit payments), the more confident the lender is about getting paid on time in the future based on the loan terms.

Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.

For example, if you pay $2000 a month for your mortgage and another $200 a month for an auto loan and $500 a month for the rest of your debts, your monthly debt payments are $2700. ($2000 + $200 + $500 = $2,700.) If your gross monthly income is $7000, then your debt-to-income ratio is 38.57 percent. ($2700 is 38.57% of $7000.)

What is Front-End vs. Back-End DTI?

Debt ratios for home loans have two components.

The Front-end DTI ratio measures your gross income from all sources before taxes against your proposed monthly housing expenses, including the principal, interest, taxes and insurance that you’d be paying if the lender approved the mortgage you’re seeking.

The Back-end DTI ratio measures your income against all your recurring monthly debts. These include housing expenses, credit cards, student loans, personal loan payments and others. Under federal “qualified mortgage” standards, your back-end ratio maximum was capped at 43%, although with recent announcements from Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, there is wiggle room case by case

Why is the 43% Debt-To-Income Ratio so Important?

For loans to be eligible for sale to Fannie Mae or Freddie Mac, lenders have to follow the 43% guideline set by the GSEs.

The federal “qualified mortgage” rule sets the safe maximum at 43%, although Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) all have exemptions allowing them to buy or insure loans with higher ratios.

FHA traditionally allowed DTIs over 50% for some borrowers, however those borrowers have to pay private mortgage insurance (PMI) for the life of the loan.

Freddie Mac also uses private mortgage insurance and will accept loan applications with DTIs above 45%.

Fannie Mae will be raising its DTI ceiling from the current 45% to 50% as of July 29, 2017.

Fannie Mae also uses private mortgage insurance on its low down payment loans, but the premiums are automatically canceled when the principal balance drops to 78% of the original property value.

As an prospective borrower, your application will still have to go through Fannie’s automated underwriting system (Desktop Underwriter), which examines your entire application, including the down payment, your income, credit scores, loan-to-value ratio and a slew of other indexes.

Takeaways

Studies by the Federal Reserve and FICO, the credit scoring company, have documented that high DTIs doom more mortgage applications — and are viewed more critically by lenders — than any other factor. And for good reason: If you are loaded down with monthly debts, you’re at a higher statistical risk of falling behind on your mortgage payments.

In general, we think your front-end and back-end DTI ratios should be 28% and 36% respectively, or lower.

  • FHA limits are currently 31/43, though these can be higher with justification from the lender.
  • VA limits (for veterans) are only calculated with one DTI of 41.
  • Conforming loans have to conform with the DTI limits we mention above for your mortgage loan to be eligible for sale to Fannie Mae and Freddie Mac
  • However, a non-conforming (Jumbo) loan does not conform to purchasing guidelines set by Fannie Mae and Freddie Mac

To learn more about DTIs, head over to Fannie Mae’s “Know your options” site (www.knowyouroptions.com).

As always, follow our STEM Lending Blog for more relevant content for you as your home buying process moves forward.

STEM Lending Home Perspectives

Understanding Different Kinds of Mortgage Lenders

Buying a home for the first time? Understanding the different kinds of mortgage lenders you will encounter when searching for your home loan will put you in a great position, early in your search process. Getting started with a mortgage application can feel confusing, even invasive. Various lenders ask for documents from every aspect of your personal and financial life, and the complexity can be overwhelming.

At STEM Lending, we are here to help bring you up to speed, quickly, while helping you understand what you need to know.

Here are several types of mortgage lenders we’ll go over in detail:

  1. Non-bank lenders
  2. Wholesale lenders
  3. Retail lenders
  4. Direct lenders (aka ‘Portfolio Lenders’)
  5. Correspondent lenders
  6. Mortgage banks
  7. Mortgage brokers

First-time homebuyers often dive into the process by looking for reasonable terms without thinking about what kind of lender they want to work with.

We believe that by understanding the different types of lenders that exist, your increase in upfront knowledge will make a sizable difference in your satisfaction & bottom-line.

For example, CFPB research showed that a borrower taking out a 30-year fixed rate conventional loan could get rates that vary by more than half a percent. Getting an interest rate of 4.0% instead of 4.5% translates into approximately $60 savings per month.

Over the first five years, you would save about $3,500 in mortgage payments. In addition, the lower interest rate means that you’d pay off an additional $1,400 in principal in the first five years, even while making lower payments.

Different Mortgage Lenders

If you know how to choose the right lender, you’ll feel more comfortable providing your profile and more confident when analyzing their rate quotes. Here’s a guide to understanding the above listed sources of consumer mortgages.

Non-Bank Mortgage Lenders

Let’s start with Non-Bank Lenders – who are they and what can they offer you?

Non-bank lenders are not considered full-scale banks because they do not offer both lending and depositing services. They are not a bank.

Banks no longer dominate the U.S. mortgage market; in 2016, non-depository independent mortgage lenders originated 47% of completed home-purchase loans and 42% of refinance loans, according to data from the Federal Reserve.

Non-bank lenders still sell the vast majority of their loans to Fannie Mae and Freddie Mac, so they must comply with their underwriting and capital standards.

Examples of these types of lenders would be Quicken Loans, Freedom Mortgage, Caliber Home Loans.

Wholesale Mortgage Lenders

In this type of lending, the wholesale lender is the one that is actually making the loan and whose name typically appears on loan documents. The third party – bank, credit union, or mortgage broker – in most cases is simply acting as an agent in return for a fee.

A wholesale mortgage lender is distinct because it works with independent mortgage brokers, who are client-facing. These brokers work on the retail end with borrowers and handle all correspondence, while simultaneously working with an Account Executive at the wholesale mortgage lender to carry out processing, underwriting, and loan funding. The borrower never actually interacts with the lender, only the broker does.

The wholesale mortgage lender funds the loan, and will usually sell it on the secondary market within a month or two.

Examples include United Wholesale Mortgage, LoanDepot LLC, and Plaza Home Mortgage.

Retail Mortgage Lenders

Retail lenders are exactly what they sound like, lenders who issue mortgages directly to individual consumers. They may either lend their own money or may act as an agent for Again, retail lending may simply be one function offered by a larger financial institution, which may also offer commercial, institutional and wholesale lending, as well as a range of other financial services.

Direct Mortgage Lenders

A direct mortgage lender is a bank or lender that works directly with a homeowner and underwrites their product in-house, without using any kind of middleman or broker. Mortgage bankers and portfolio lenders usually fall under this category if they have retail operations.

Examples include SoFi, Wells Fargo and Bank of America, though smaller entities could share this distinction as well.

Portfolio Mortgage Lenders

Portfolio mortgage lenders originate and fund their own loans, and may service them for the entire life of the loan. Because they typically offer deposit accounts to consumers, they are able to hold the loans they fund on their balance sheet.

They are also able to offer more flexibility in loan products because they don’t need to adhere to the guidelines of secondary market buyers. Once their loans are serviced and paid for on time for at least a year, they are considered “seasoned” and can be sold on the secondary market more easily.

Bank of America, Chase Bank, and Wells Fargo Bank are examples of portfolio mortgage lenders.

Correspondent Mortgage Lenders

A correspondent lender is, in some ways, a hybrid between a traditional lender and a mortgage broker. Correspondent mortgage lenders originate and fund loans in their own name, then sell them off to larger mortgage lenders, who in turn service the loans, or sell them on the secondary market.

Correspondent lenders can lend their own money, but can also shop your mortgage around to other lenders, like a broker. Whether the correspondent lender funds the mortgage directly or shops it out to another lender.

Correspondent lenders can handle loan approval with their own in-house underwriter, but the loan programs are usually based on terms approved by the larger mortgage lender, or “sponsor.”

Mortgage Bankers

Mortgage bankers are essentially “mortgage lenders” that originate and sell their loans in pools on the secondary market to investors such as Freddie Mac and Fannie Mae, along with private investors.

If they are non-depository institutions, they finance the loans with warehouse lines of credit extended by other lenders, but quickly sell them off on the secondary market so they can originate new loans. Once the mortgage is made, they sell it to investors and repay the short-term note. Those mortgages that are ‘conventional’ (loan sizes under $424,100) are usually sold onward to Fannie Mae and Freddie Mac.

Mortgage Brokers

A mortgage broker is a middle man between borrowers and banks who shops around to find a borrower the best rate and fees. While mortgage brokers may handle some of the funding paperwork, the lender is ultimately responsible for underwriting approval.

Mortgage brokers work independently with both banks/mortgage lenders and borrowers, and need to be licensed. Their job is to contact borrowers and bring in potential deals. Once they have a deal, they can send it to a mortgage bank or a wholesale lender. They need to process the loan once it is approved, and can negotiate pricing with the bank, mortgage lender.

We hope this has been an informative way for you to learn more about the different types of mortgage lenders you will come across as your search for a home loan begins. As always, please reach out to us with any further questions at support@stemlending.com or by heading to https://www.stemlending.com

 

Perspectives

Understanding your FICO Score

FICO – it’s an acronym you hear and read a lot about, but do you know what it means?

Fair Isaac Corporation (“FICO”), is a data analytics company founded in 1956, and is focused on scoring your credit.

Based on what we know, FICO weights certain criteria differently, including:

35% payment history

30% amount owed

15% length of history

10% new credit

10% types of credit used

Here’s the important thing to remember – your credit report is different from your credit score.

What’s a Credit Report?

Your credit report shows how well you repay each of your debt obligations, while your credit score estimates your creditworthiness with one numerical value.

A credit report includes information about your past and existing credit agreements, such as credit card accounts, mortgages, and student loans, and lists “inquiries” about your credit history. It outlines how much you owe creditors, how long each account has been open, and how consistently you make on-time payments. Credit reports also list related public records, such as collections or court judgments against you, tax liens on your property, or bankruptcy filings.

What’s a Credit Score?

A credit score is best thought of as a grade given to your specific credit report.

There are three different credit reporting agencies – Equifax, Experian, and Transunion – each of which assigns you a credit score. When you request your credit score, you will actually receive three numbers in return, and since the numbers will be coming from different reporting agencies, they may all be different.

Lenders typically assign interest rates based on what bucket your credit score falls into. Insurance companies, landlords, mortgage lenders, and even potential employers now review your credit score as a benchmark for figuring out how responsible you are.

The most widely used score, FICO, ranges from 300 to 850. On the FICO scale, the higher the number, the better.

How Can I Access my Credit Report and Credit Score?

The Fair Credit Reporting Act (“FCRA”) allows consumers access to one free credit report annually from each of the three credit reporting agencies. The free annual credit report will not contain your credit score. To access your credit score for a fee, you can contact the credit reporting agencies. There are also credit monitoring services available for a fee that can provide this information for you. Many banks and credit card companies now provide credit scores to their customers.

By understanding your credit report and credit score – and checking them regularly – you can make informed choices that will impact your financial future.

Generally, a credit score over 740 is considered excellent. If your score is below 650, you may see higher interest rates for loans and credit cards and should consider taking steps to improve your credit.