Tag: mortgage

Taxes and homeowners Perspectives

How The Tax Bill Affects Homebuyers

For years, the US tax code has encouraged Americans, especially first-time homebuyers, to get “a piece of the American dream” by becoming homeowners. Since the 1940s, America has seen the positive effects of building credit and building equity through homeownership.

America is one of the few countries in the world to offer potential homeowners a fixed-rate 30-year mortgage product. Homeowners have benefited for decades from tax incentives that allow us to deduct mortgage interest from our tax bill, and from home equity lines of credit that can help pay for a child’s college tuition.

Get ready for some changes in 2018.

This week, both the US House of Representatives & US Senate passed the most sweeping changes to the US tax code since 1986. The new tax bill cuts the corporate tax rate, revises the existing tax bracket structure at every income level, and includes several significant changes to deductions that historically offered incentives to first-time homeowners.

The bill is ready to be sent to President Donald Trump, and could be signed into law before Christmas, so we at STEM Lending wanted to tell you about several specific changes that are likely to affect your search in 2018:

tax code us tax bill

How The New 2018 Tax Bill Could Affect You:

Mortgage Interest Deductions

Mortgage interest deductions were once thought to be untouchable as a strong incentive for first-time home buyers. The history of this incentive was originally a part of a 1913 tax provision which allowed business owners (ex. farmers) to deduct any interest they paid on business expenses. The mortgage-interest deduction now lets people who buy homes deduct part of the cost of their mortgage on their taxes. According to the Joint Committee on Taxation, MID saved Americans $77 billion last year!

What was finalized in the new tax bill, however, caps the limit on deductible mortgage debt at $750,000 for loans taken out after Dec. 14, 2017.  If you took out a mortgage loan before Dec. 14, you will still be able to deduct interest on mortgage debt up to $1 million. Mortgage interest on second homes can be deducted but is subject to the $750,000 limit.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Mortgage interest

You may deduct the interest you pay on mortgage debt up to $1 million ($500,000 if married filing separately) on your primary home and a second home.

For homes bought before Dec. 15, 2017, no change. But for homes bought Dec. 15, 2017, or later, you may deduct the interest you pay on mortgage debt up to $750,000($375,000 if married filing separately).

Property Taxes

Currently, taxpayer can fully deduct what they pay in state and local property, income, and sales taxes from their federal tax returns. The new tax law in 2018 caps these total deductions at $10,000. This new law may have a very real affect on your bottom line if you reside in a state with above-average local and state taxes like New Jersey, New York, Oregon, or California. *One caveat* the $10,000 cap can be any combination of property, income, and sales taxes. This compromise between House & Senate Republicans was very closely watched, and will surely be a rallying point in the coming months, when midterm elections are held.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Property taxes

You may deduct the property taxes you pay on real estate you own.

You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.

Capital Gains Exclusion

If you’re planning on selling your house in 2018, you know that capital gains taxes = the difference between the price you paid for the house and the price you ultimately sell it for. If you have not lived in the home you are selling for at least two years, your capital gain is treated as taxable income under the ‘ordinary income’ tax brackets (which also just changed). Home sellers can benefit by excluding up to $500,000 for joint filers or $250,000 for single filers for capital gains when selling a primary home as long as the homeowner has lived in the residence for 2of the last 5 years.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Capital gains

In order to qualify for this provision, it is mandatory that you have lived in the home as your primary residence for at least 2 of the last 5 years, before selling.

With all the 2018 tax changes set to take effect January 1, 2018, how will this affect your decision to buy a home? If you are looking at getting pre-approved, or already searching with a real estate agent, give us a call at 646-798-1800, or email us at support@stemlending.com so we can help find you the best mortgage loan. Visit STEM Lending to apply online, or learn more about the mortgage process.

We look forward to helping you find your dream home in 2018.

Mortgage Pre-approval Application Perspectives

How to prequalify for mortgage?

Home buyers can simplify the steps of buying their dream home by prequalifying for a mortgage. So, what exactly does a prequalify mean?

Mortgage pre-qualification enables you to estimate how much you can borrow from a lender. This helps you plan for the maximum price of the home you can afford using a mortgage financed by that lender.

Clearly, for maximum value, you would want to explore multiple lenders, comparing their mortgage products and the interest rates they quote. This is where working with an online mortgage broker such as STEM Lending helps you save. You can compare multiple options with much lesser time spent as compared to shopping offline. Explore options here: https://www.stemlending.com/apply.

What are the factors influencing the prequalification amount?

Factors that influence the dollar value of pre-qualification by a lender include:

  • Credit score
  • Monthly disposable income
  • Financial assets; and
  • Overall debt at the time of application.

It is essential to build up a strong credit score and monitor your credit before applying for pre-qualification. To learn more, check out STEM Lending’s article on credit report monitoring: Proactively monitor credit report before seeking mortgage.

A key metric to understand regarding mortgage pre-qualification is your monthly Debt-to-Income ratio, often abbreviated as DTI. The debt-to-income ratio is: (Sum of all the Monthly Debt Payments) divided by (Gross Monthly Income).

This number is measure by which lenders assess your ability to repay the mortgage, since a high debt-to-income ratio can render the borrower miss a scheduled mortgage payment in the event of a large unforeseen expense, increasing the potential likelihood of default.

Common metrics that are included in monthly debt payments, thereby impacting the DTI, include:

  • Monthly payment on new mortgage
  • Student loan payments
  • Credit card payments
  • Auto loan payments
  • Home appliance loan payments; and
  • Other recurring debt payments present in credit report.

Lenders may set DTI thresholds for mortgage applicants and many lenders may not pre-qualify applicants with Debt-to-Income ratio greater than those thresholds. To learn more about DTI, and how it impacts your mortgage application, check out STEM Lending’s article: Explaining Debt-to-Income “DTI” and Its Importance.

Notably, other factors also indirectly impact the DTI by means of monthly mortgage (Debt) payment. These include:

  • Approved mortgage interest rate
  • Loan-to-value ratio (LTV)
  • Credit score
  • Property usage
  • Late payment history and
  • Any foreclosures or bankruptcies on record

Pre-qualification is not the same as Pre-approval

First-time home buyers should note that mortgage pre-qualification is not the same as pre-approval. Pre-qualification is a conditional approval of the mortgage — an estimate of how large a mortgage one can afford. However, it doesn’t create a binding commitment between the home-buyer and the lender. Pre-approval, on the other hand, involves a detailed review of applicant’s debt, income, assets and credit history and the borrower can receive a Pre-Approval Letter documenting the amount that the borrower has been approved to borrow. To learn more about differences between Pre-approval and Pre-qualification, read STEM Lending’s article: Mortgage 101: Pre-approval vs. Pre-qualification Letter.

To take the first step in getting prequalified for a mortgage and save on your mortgage, contact STEM Lending for a free initial consultation:

  1. Message: stemlending.com/contact-us
  2. E-mail: hello@stemlending.com
  3. Call: +1 (833) 600-0490 (toll free)

STEM Lending also offers simple and free mortgage calculators for you.

Wishing you a happy home buying experience!

– STEM Lending Team

New Homes. New Homeowners. 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.

 

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.

News

Home Loan Toolkit

Consumer Financial Protection Bureau has published a valuable guide, Your home loan toolkit: A step-by-step guide, to help homebuyers navigate the complexities of home buying process. We at STEM Lending are committed to help demystify the home buying process for first time mortgage seekers.

A few excerpts from the toolkit (Full Home Loan Toolkit referenced below) follow:

Choosing the best mortgage for you:

1. Define what affordable means to you

Only you can decide how much you are comfortable paying for your housing each month. In most cases, your lender can consider only if you are able to repay your mortgage, not whether you will be comfortable repaying your loan. Based on your whole financial picture, think about whether you want to take on the mortgage payment plus the other costs of homeownership such as appliances, repairs, and maintenance.

2. Understand your credit

Your credit, your credit scores, and how wisely you shop for a loan that best fits your needs have a significant impact on your mortgage interest rate and the fees you pay. To improve your credit and your chances of getting a better mortgage, get current on your payments and stay current. About 35% of your credit scores are based on whether or not you pay your bills on time. About 30% of your credit scores are based on how much debt you owe. That’s why you may want to consider paying down some of your debts.

3. Pick the mortgage type—fixed or adjustable—that works for you

With a fixed-rate mortgage, your principal and interest payment stays the same for as long as you have your loan.

  • Consider a fixed-rate mortgage if you want a predictable payment.
  • You may be able to refinance later if interest rates fall or your credit or financial situation improves.

With an adjustable-rate mortgage (ARM), your payment often starts out lower than with a fixed-rate loan, but your rate and payment could increase quickly. It is important to understand the trade-offs if you decide on an ARM.

  • Your payment could increase a lot, often by hundreds of dollars a month.
  • Make sure you are confident you know what your maximum payment could be and that you can afford it.

Planning to sell your home within a short period of time? That’s one reason some people consider an ARM. But, you probably shouldn’t count on being able to sell or refinance. Your financial situation could change. Home values may go down or interest rates may go up.

4. Choose the right down payment for you

A down payment is the amount you pay toward the home yourself. You put a percentage of the home’s value down and borrow the rest through your mortgage loan.

5. Understand the trade-off between points and interest rate

Points are a percentage of a loan amount. For example, when a loan officer talks about one point on a $100,000 loan, the loan officer is talking about one percent of the loan, which equals $1,000. Lenders offer different interest rates on loans with different points. There are three main choices you can make about points. You can decide you don’t want to pay or receive points at all. This is called a zero point loan. You can pay points at closing to receive a lower interest rate. Or you can choose to have points paid to you (also called lender credits) and use them to cover some of your closing costs. The example below shows the trade-off between points as part of your closing costs and interest rates. In the example, you borrow $180,000 and qualify for a 30-year fixed-rate loan at an interest rate of 5.0% with zero points. Rates currently available may be different than what is shown in this example.

6. Shop with several lenders

You’ve figured out what affordable means for you. You’ve reviewed your credit and the kind of mortgage and down payment that best fits your situation. Now is the time to start shopping seriously for a loan. The work you do here could save you thousands of dollars over the life of your mortgage.

Explore Options

Reference: CFPB Home Loan Toolkit

Notes

Buying a home? Check your credit before mortgage

Consumer Financial Protection Bureau (CFPB) has published an essential set of guidelines for consumers looking for a mortgage. CFPB highlights:

Buying a home is one of the most important financial decisions you’ll make. Choosing a mortgage to pay for your new home is just as important as choosing the right home. You have the right to control the process.

Research shows that people who plan carefully for big purchases, like owning a home, are less likely to run into financial trouble later. So if you are thinking about buying a home this year, the first step is to check your credit. It’s always a good idea to review your credit reports and scores periodically, even if you’re years away from shopping for a home and a mortgage. If you’re planning to buy a home this year, we recommend checking your credit reports and scores as soon as possible.

The better your credit history, the more likely you are to receive a good interest rate on your mortgage loan. Lenders will use your credit reports and scores as important factors in determining whether you qualify for a loan, and what interest rate to offer you. If there are errors on your credit report, you may have trouble qualifying for a loan. So, don’t delay in checking your credit. Review your credit reports and take steps to fix any errors.

Credit basics

A credit report contains information about your credit such as the status of your credit accounts and your payment history. Lenders use these reports to help them decide if they will loan you money, and at what interest rate. Credit reporting companies (also known as credit bureaus or consumer reporting agencies) compile these reports. Credit scores are calculated using a mathematical formula — called a scoring model — that companies and lenders use to predict how likely you are to pay back a loan on time. Your credit scores are calculated from the information in your credit report.

Your credit report

Here’s a step-by-step guide to getting, reviewing, and understanding your credit reports.

1. Request your free credit report online or over the phone.
There are three major credit reporting companies – Equifax , Experian , and TransUnion . Each company maintains a separate report. You have the right to a free copy of your credit report once per year from each of the three companies at www.annualcreditreport.com . You can also call 1-877-322-8228.

If you review your credit report from one of the major companies every four months, you can get a good idea of your credit throughout the year at no cost. However, if you are planning to start the homebuying process within the next six months to a year, you may want to request and review all of them at once to check for errors or issues. Checking your credit report will not hurt your credit score.

Your free credit report does not include your credit scores – keep reading to learn how to check your scores.

2. Review your credit report.
Once you get your credit report, you will want to review it carefully. Ordering it is not enough — you have to read it. Credit reports may have mistakes. And if there are mistakes, you are the one who is most likely to find them. Incorrect information can appear on your report because the credit bureaus processed the information incorrectly or because lenders or debt collectors sent flawed information to the credit bureaus or did not update the information they previously reported. Incorrect information may also be a result of fraud, such as when someone uses your identity to open accounts or takes on debt without your knowledge. You should review your credit report for any errors or fraudulent activity.

When you review your credit report, look for:

  • Incorrect first and last names
  • Addresses of places where you did not live
  • Names of employers you did not work for

Review each account listed on your credit report. If you see any of this information, highlight it:

  • Accounts you don’t recognize
  • Accounts that are listed twice
  • Accounts that have been closed but are listed as still open
  • Incorrect current balances
  • Incorrect negative account information, such as late payments and missed payments
  • Negative account information, such as late or missed payments, that is more than seven years old

Check the credit inquiries section of your credit report:

Look at the section labeled “inquiries that may impact your credit rating” or “inquiries shared with others.” Are there any companies listed that you don’t recognize? This section should only include companies that you have applied for credit with in the past two years.  Inquiries listed in sections labeled “inquiries shared only with you,” “promotional inquiries,” or “account review inquiries” do not impact your score.

Check the “negative information” section:

  • Are there accounts placed in collection that you don’t recognize or that are more than 7 years old?
  • Are there public records such as civil lawsuits, judgments, or tax liens that you don’t recognize or that are more than seven years old?
  • Are there bankruptcies that are more than 10 years old?

With each credit report you get, use this checklist to help you review and check for errors.

You can use CFPB’s printable Credit Report Review Checklist to help you review each section of your credit report. We recommend using this worksheet for each credit report you get throughout the year. Then, keep the completed checklist with your credit reports.

3. Report any errors, fraudulent activity, or outdated information.
If you find errors or fraudulent activity after your review of your credit report, you have the right to dispute inaccurate or incomplete information. Keep in mind that there’s a difference between inaccurate or incomplete information and negative but accurate and complete information. Both can lower your credit score, but a credit reporting company will only correct information that is inaccurate or, incomplete, or outdated.

To dispute an error, you should contact both the credit reporting company and the company that provided your information to the credit reporting company. For example, if you review your report and find a listing for a student loan you never took out, you should contact both the credit reporting company that provided the report and the student loan company listed. Be sure to include supporting documentation with your disputes to both companies. The companies must conduct an investigation and fix mistakes as needed.

The three major credit reporting companies provide instructions for filing a dispute online: Equifax , Experian , and TransUnion . You can also submit a dispute by phone or paper mail. The CFPB provides a sample dispute letter that you can use if you want to submit your dispute by mail.

No matter how you submit your dispute, make sure to include:

  • Your complete name
  • Your address
  • Your telephone number
  • A clear description of what you are disputing (e.g., wrong name, not my account, wrong amount, wrong payment history)
  • If you are disputing something about a specific account, a clear description of which account, including the account number if possible
  • Copies of any documents you have that relate to the inaccurate or incomplete information

Beware of any service that says it can dispute inaccuracies for a fee. You have a legal right to dispute inaccuracies yourself, at no cost. If you find an error on one of your credit reports, check your credit reports from all three reporting agencies. Lenders operate differently from one another, so while one may pull your Experian report, another might pull your TransUnion or Equifax report. It’s important to make sure they’re all accurate.

If you find outdated negative information on your credit report, contact the credit reporting company and ask that it be removed. Bankruptcies are considered outdated if they are more than 10 years old. Most other negative information is considered outdated if it is more than 7 years old.

Your credit scores

A credit score is a number based on information contained in your credit report. You don’t have just one credit score. There are many credit scoring formulas, and the score will also depend on the data used to calculate it.

Different lenders may use different scoring formulas, so your score can vary depending on what type of score the lender uses (a mortgage score or an auto score, for example). Today, most mortgage lenders use a FICO score when deciding whether to offer you a loan, and in setting the rate and terms. Your FICO score will differ depending on the credit bureau and FICO scoring model your lender uses – so you have an Experian FICO score, an Equifax FICO score, and a TransUnion FICO score. Also, be aware that your score changes as the information in your credit report changes.

Different scoring formulas may come up with somewhat different numbers for your credit score, but they are all based on the same key information:

  • Your payment history: How you’ve handled loans and credit cards. This category includes details about whether you’ve made payments on time, missed payments, or had accounts in collection.
  • How much you owe: The amount of debt you’re carrying compared to your available credit line or the original loan balance.
  • Length of credit history: How long you’ve been borrowing money.
  • Credit mix: Your history managing different types of loans.
  • New credit: How many accounts you’ve applied for or opened in the past six to twelve months.

Most FICO scores range from 300-850. A higher score makes it easier to qualify for a loan and may result in a better interest rate. As of March 2015, the median FICO score nationwide was 721. The best rates go to borrowers with credit scores in the mid- to high-700s or above.

How to get your credit score?

There are several ways to get a credit score, some of which are free. When choosing how to get a score, pay attention to the fine print about how the score is calculated. Some companies that offer credit scores use different scoring models than lenders use. Here are 4 ways to get a score:

Check your credit card or other account statement (free). Many major credit card companies and some banks and credit unions have begun to provide credit scores for all their customers on a monthly basis. The score is usually listed on your monthly statement, or can be found by logging in to your account online.
Talk to a non-profit counselor (free). Non-profit credit counselors and HUD-approved housing counselors can often provide you with a free credit report and score and help you review them. A counselor may also be able to help you with the homebuying process.
Buy a score (comes with a fee). You can buy a score directly from the credit reporting companies. You can buy a FICO credit score at myfico.com . Other services may also offer scores for purchase. If you decide to purchase a credit score, you are not required to purchase credit protection, identity theft monitoring, or other services that may be offered at the same time.
Credit score services (can come with a fee). Many services and websites advertise a “free credit score.” Some sites may be funded through advertising. Other sites may require that you sign up for a credit monitoring service with a monthly subscription fee in order to get your “free” score. These services are often advertised as free trials, but if you don’t cancel within the specified period, you could be on the hook for a monthly fee. Before you sign up for a service, be sure you know how much it really costs.

Source: https://www.consumerfinance.gov/about-us/blog/buying-home-first-step-check-your-credit

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News

Technology’s role in getting a mortgage today

Devon Thorsby from US News reports:

If you can manage numerous accounts online without ever having to sit down for a face-to-face conversation with another human, why is the process of getting a mortgage so different?

A potential cause of slow advancements of technology in the mortgage industry is the fallout of housing crisis, however lenders are beginning to embrace more new technology, and new lenders are even entering the game based around an automated platform.

Four things to know about how technology is now playing a part in your mortgage process:

(i) Options go beyond the online form: An important part of the mortgage industry’s evolution is automation – not just allowing you to fill out forms online, but also granting access to financial and employment backgrounds without requiring repetitive work for you.

Rather than having to provide all the same detailed pieces of information you would when filling out a paper form, your communication with the lender is more about borrowing programs that would fit best and not what details you have or haven’t provided yet. The online platforms are also designed to provide detailed updates about your application and the approval process and often allow you to e-sign documents so you avoid adding new meetings to your existing list of sit-downs throughout the homebuying process.

(ii) Face-to-face options remain. Of course, there’s no way every consumer looking to purchase a home is going to feel comfortable getting a mortgage online, whether it’s a tech-literacy issue or simply because you may enjoy an in-person conversation.

(iii) Security and protection is a major focus. We hear almost every day about a new data hack in a retailer, firm or even hospital that has compromised consumers’ private information. Knowing how much valuable information is compiled during the mortgage approval process, companies are taking measure to reduce the chances of that happening.

(iv) The industry is poised for tech growth. Even with the progress of the last year and a half, the mortgage industry is likely in just the beginning stages of its evolution to catch up with the travel, banking and other tech-transformed industries.

Homebuyers and other borrowers can reasonably expect for automation in verification of employment and financial history to expand to cover more people as technologies develop and a larger portion of the industry gets on board.

Further behind-the-scenes automation means the loan approval process can be streamlined and made more accurate. Already, Fannie Mae’s Automated Property Service uses its extensive information to provide a predicted property value and a confidence score to be used as a factor when considering eligibility for the Home Affordable Modification Program. As more major industry players support a more transparent process, small and large lenders nationwide will be able to automate more as well.

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Source: http://realestate.usnews.com/real-estate/articles/how-technology-plays-a-part-in-getting-a-mortgage-today

News

Avoiding costly refinancing mistakes: Knowing when to wait

Serafin Grundl and You Kim recently published a research article in Federal Reserve System’s Finance and Economics Discussion Series on “Consumer Mistakes and Advertising: The Case of Mortgage Refinancing”. The authors estimate the effect of advertising on consumer mistakes and quantify the resulting net effect on consumers in the market for mortgage refinancing. They demonstrated that a policy that redirects all advertising to borrowers who should refinance would appreciably increase the gain in borrower welfare.

Specifically, authors note that mortgage refinance (refi) advertising can help inattentive borrowers who should refinance but fail to take advantage of lower interest rates by informing them. However, refi ads can also be deceptive. Lenders commonly advertise the projected reduction in monthly mortgage payments without pointing out that this reduction is partly achieved through an extension of the loan term, rather than through a reduction of the interest rate. Such ads have the potential to convince borrowers who should wait to refinance prematurely.

The article truly reverberated with the STEM Lending team: we at STEM Lending are committed to helping our clients make rational financial decisions and be a trusted advisor to them, striving to help them make the right decisions concerning their mortgage at the right time.

In coming months, we will continue to publish a series of STEM Perspectives, helping demystify the mortgage landscape. Stay tuned and feel free to reach us on Facebook (https://www.facebook.com/STEMLending), Twitter (https://twitter.com/STEMLending) or via email at hi@stemlending.com if you have anything to share!

Reference: Consumer Mistakes and Advertising – The Case of Mortgage Refinancing

News

The State of The Nation’s Housing 2017

Harvard University’s Joint Center for Housing Studies reports: A decade after the onset of the Great Recession, the national housing market is finally returning to normal. With incomes rising and household growth strengthening, the housing sector is poised to become an important engine of economic growth. But not all households and not all markets are thriving, and affordability pressures remain near record levels. Addressing the scale and complexity of need requires a renewed national commitment to expand the range of housing options available for an increasingly diverse society.

Housing markets continued to strengthen in 2016, with new and existing home sales, prices, and construction levels all on the rise. Still, single-family construction, traditionally the largest source of residential investment, remains well below historical levels. As a result, low inventories of homes for sale are driving nominal prices above pre-recession peaks in many metros. In rental markets, low vacancy rates are pushing up rents and keeping multifamily construction relatively strong. Easing these tight conditions is especially difficult where labor shortages and limited land availability constrain new housing supply.

Household growth, the primary driver of housing demand, has picked up and is likely to remain strong as members of the millennial generation increasingly move into their 20s and early 30s over the coming decade. But immigration, typically a large source of household growth, could be in for a slowdown. Worsening income inequality, along with the increasing concentration of poverty and affluence, are also concerns. Still, the growing diversity and overall aging of the US population ensure that demand for a variety of housing types and locations is set to increase.

Although still on the decline, the national homeownership rate showed signs of stabilizing in 2016. The foreclosure inventory is approaching its pre-crisis volume and home purchase activity is slowly increasing. While high costs pose a challenge in certain markets, homeownership remains affordable in many metro areas of the country. Meanwhile, with conventional mortgage credit still tight, FHA continues to play a central role in serving first-time homebuyers. While the strengthening economy and the aging of the millennial generation may lift demand for homeownership, much uncertainty surrounds future economic, credit, and housing market conditions.

After more than a decade of soaring demand and five years of real rent increases, rental markets across the nation remain extremely tight in 2016. Rapid growth in both renters and rents continued in most markets, although the pace moderated somewhat in certain high-cost markets. Meanwhile, multifamily construction took up the lead from single-family conversions in adding supply, but most of these new apartments are concentrated at the high end. As a result, the diminishing supply of lowcost rental housing remains in high demand, fueling ongoing concerns about the market’s ability to meet the housing needs of lower-income households.

Nearly 39 million US households live in housing they cannot afford. The shrinking supply of low-cost rentals, along with potential losses of subsidized units and declines in the value of tax credits, could widen the already substantial gap between the demand for and supply of affordable housing. Meanwhile, the retrenchment in federal funding has put increased pressure on state and local governments to address the housing needs of the most vulnerable individuals. The aging of the US population adds to the nation’s challenges by driving up demand for housing that is both accessible and affordable.

Reference: Joint Center for Housing Studies of Harvard University 2017

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Notes

Mortgage 101: Pre-approval vs. Pre-qualification Letter

Mortgage Pre-Approval:

A mortgage pre-approval is a written commitment that’s issued by a lender following a comprehensive analysis of their overall creditworthiness. A pre-approval includes such factors as verification of income, verification of employment, available financial resources, as well as the evaluation of other areas typical of a credit evaluation process.

Mortgage pre-approval status for a loan is usually conditional upon the following:

1. A suitable property. The identification by the buyers of a suitable property.

2. Continued creditworthiness. Continued creditworthiness means there is no material change in the applicant’s creditworthiness or overall financial condition before closing the sale.

3. Additional terms.  Other limitations that may or may not be related to the creditworthiness and financial condition of the applicant. These added items are ordinarily attached to the traditional mortgage application by the lender and can include an acceptable title insurance binder, the completion of a home inspection with some types of loans (VA and FHA), a certification of no termites, or similar again with certain kinds of mortgage products.

An issuance of a mortgage pre-approval letter from the lender implies that a credit decision has been made that will more than likely favor the issuance of a mortgage commitment letter at some point shortly. In effect, the mortgage loan has been submitted to underwriting.

Mortgage Pre-Qualification Letter

The concept behind a mortgage pre-qualification is this: you are a buyer, and you’re looking for a home. You might not have sufficient funds to purchase a home for cash; however, this defines most home buyers. As a result of these circumstances, your ability to buy a home depends on upon your ability to borrow money. Because of this, you’ll talk with potential lenders before shopping for homes to determine your mortgage buying power and be able to consider different loan programs to decide which might be ideal for you.

“A mortgage pre-qualification” is an estimate of your borrowing power. It is, in effect, a statement from the lender putting forth that based upon your current financial circumstances, i.e. income, debt and credit levels, you will likely be qualified for a mortgage for a certain amount. Receiving “pre-qualification” can be accomplished fairly simply by just a phone call to the lender. The lender may or may not run your credit report to confirm the details of your finances and get a clearer picture of the amount and terms you’ll qualify for.

Pre-qualification vs. Pre-approval: What’s the Difference?

In a nutshell, the difference between being “pre-approved” and “pre-qualified” is as follows:

“Mortgage pre-qualification” is a determination about whether or not the prospective applicant will most likely qualify for a loan within the lender’s current programs and standards. It is also a decision about the possible amount of the loan for which the prospective applicant will qualify.

“Mortgage pre-approval” is a much more formal process. With pre-approval, you’ll have completed an application with the lender, supplied them with income data, your W2’s, bank statements, etc. The bank has gathered information about your employment and will also run your credit report; the lender will have run the application through an automated underwriting process. A pre-approval is a far more complete and comprehensive process than what is utilized for pre-qualification status.

The Mortgage Pre-Approval Advantage

A pre-approval means that you are far closer to receiving a mortgage loan commitment from a lender than with just a pre-qualification. A pre-approval can help buyers to take some of the guesswork out of the home buying process. In the eyes of any seller, you are considered a “stronger customer” with pre-approval status than with just a pre-qualification letter.

Pre-approval is very helpful as a bargaining tool in negotiating a better deal with a seller. Overall, having a pre-approval can make you feel more comfortable with the home buying process and have more of a leg to stand on when negotiating with sellers. It should be duly noted that any good Real Estate agent is going to require a buyer to have a pre-approval letter and NOT just a pre-qualification when they are representing a seller.

You should understand that neither a “pre-qualification letter” nor “pre-approval” are viewed as absolute, iron-clad loan commitments from lenders. A creditor will still have to look closer to assess property appraisals, verify the information collected, and in some cases, re-check the applicant’s credit report again before agreeing to issue a loan. Having a pre-approval in hand, however, is about as close as you can get to knowing you will get financing.

When a buyer is pre-approved they will typically not get financing unless one of the following takes place:

  • The buyer loses their job before closing.
  • The buyer has misrepresented something in their mortgage application.
  • The buyer has not disclosed something to the lender like an impending divorce.
  • The home does not appraise for the value needed to get financing.

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Original Source: Maximum Real Estate Exposure