Home Lending Loan Dirty Secrets Revealed

There are literally hundreds of home lending loan programs available today. Depending on your credit, income, and other factors, you will be pigeonholed into a few of them. Some lenders, upon reviewing your application, will give you a choice of which home lending loan programs you want to pursue. Others will try to sell you on one product. What are the different choices?

As the name suggests, this type of home lending loan has an interest rate that does not fluctuate for the entire life of the mortgage. When you apply for this kind of home lending loan, you would usually try to "lock in" a particular interest rate, thus guaranteeing that you will be paying the rate you were quoted when you applied for the home lending loan.

Pros: No matter what happens in the real estate market or the economy, you will always pay the same interest rate, and payment, for the life of the home lending loan. If you plan to stay in your home for at least 7-10 years, this should be your only option.

Cons: Being locked into one particular rate means that even if rates go DOWN, you still will be paying your higher fixed rate. Of course, you could always refinance your home lending loan at the new rate.

ARMs come in many different flavors. ARMs fluctuate depending on the terms of your particular program. Whether or not the rate fluctuates depends on the INDEX that the ARM is based upon. Many ARMs, for example, are based on LIBOR (London Interbank) rates. In theory, rates may go up or down depending on the market. However, with LIBOR rates, it will rarely, if ever, go down. Usually, you will not see any rate adjustments for 6 months.

TIP: Carefully read the terms of your ARM. Your initial rate might be your "floor" rate, meaning that no matter how much rates go down, your rate will never go below the floor rate.

Pros: You will benefit from your rate going down. ARMs are great for homebuyers who want to maximize their buying power. Because the rates start out low, your payment will start low, and therefore gives you more room in your debt ratio. You will be able to afford a bigger or more expensive house. In addition, if you only plan to stay in your home for a very short amount of time, any rate fluctuations you experience should not have a profound effect.

Cons: You will not benefit from your rate going up. You also will need to be careful if you're using an ARM to increase your purchase power. If the rate goes up to a point you can't afford, you may not be able to make your payments and risk losing your home through foreclosure.

These have a combination of fixed and adjustable characteristics. Common programs include a 5/1 ARM or a 2/28. A 2/28 means that the mortgage stays fixed for the first 2 years of the loan. After the second year, the mortgage will become an adjustable mortgage for the rest of the 28-year term (obviously making this a 30-year mortgage).
Pros: These kinds of programs are perfect for homebuyers. The rate you're given for the fixed rate portion of the loan is usually lower than a standard fixed-rate mortgage, thus enabling you to afford more house.
Cons: If you don't sell or refinance your home within the fixed portion of the mortgage, you may end up paying more than you can afford.

TIP: In prepayment penalty states, beware of companies who give you a 2/28 with a prepayment penalty of 5 years. That means you're stuck with dealing with rate adjustments until the 5 years are up, unless you're willing to pay the penalty. While reducing the prepayment penalty will increase the rate somewhat, you may be better off paying the higher rate than a penalty that will eat up your equity when you sell or refinance.

There are many ways that a borrower and a mortgage company can come together. Perhaps you saw an advertisement and called them. Alternatively, perhaps they called you.

Tip: When receiving an unsolicited call from a mortgage company, many people ignore the messages. That will prompt the mortgage company to continue calling. You can banish your name permanently from their call lists simply by telling the caller to remove your name from their list. By law, they cannot call you again. If they do, you can contact the FTC, and in some cases earn hundreds of dollars!

Regardless of how you found the lender, you decide that you are willing to go forward with the process. You pick up the phone, and you inquire about one. Lenders MUST follow certain guidelines when handling your call. They are NOT allowed to prejudge you. For example, if you call them and volunteer information such as "I filed bankruptcy last year," they cannot tell you that you will not qualify for a mortgage. How can they? They have not even seen your credit report! By law, they must encourage you to take an application IF YOU DESIRE. By telling you that you will not qualify, they, in essence, have made a credit decision without looking at your credit report. They then MUST send you a form within 30 days detailing the decision they made. This process of making a credit decision without an application is illegal.

However, they CAN legally tell you what their guidelines are. For example, they can say, "With regard to bankruptcy, our general guideline is that we can loan up to 70% of your home's value. Would you still like to take an application?" What the lender is doing is presenting you with their guideline for a certain situation. It places the burden back on the borrower to decide whether to make an application. No credit decision took place on the part of the lender. There are several nuances to this law, but it is pointless to discuss. Suffice it to say that if you suspect that a lender discouraged you from taking an application, or if they made a credit decision without pulling credit, they have broken the law. This may be a sign that this is the sort of company you do not want to send all of your personal information to.

Now the wait begins. For those who have gone through the mortgage process before, they may have unpleasant memories about this time. Some are lucky enough to work with a mortgage company that holds their hand through the entire process. Others are kept in the dark until the loan is closed. Here, we discuss what goes on behind the scenes, so that you can avoid any anxiety and even keep your lender on their toes!

After you have completed your application and have been "pre-approved," you will submit all of your documentation to a Loan Processor. This is what is meant when you are told that your loan is being processed. The processor is responsible for obtaining, collecting, and verifying information. They will confirm your employment, obtain payoffs from any creditors that will be paid off because of the loan, verify any liens or judgments against you, order your title, order your appraisal, among other tasks.

Depending on your loan program and the complexity of your situation, this can take anywhere from 5 days all the way up to 8 weeks. There are certainly some things that you, as the borrower, cannot control during the processing phase. However, there are other things within your control to help cut down on this processing time. Actually, you will do your lender a favor if you help in cutting down the processing time.

Since processing is all about documentation and verification, it would behoove you to have everything ready. In addition, communication is the key. Many people are under the impression that the only person they can have contact with during the mortgage process is the loan officer. Not only is this untrue, it is probably costing you time by dealing with them. Remember, a loan officer is a salesperson. Once they sell you the loan, their hands are cleansed of your file. This is not to say that they don't care about you, because they do-they care about the commission they will be getting when your loan is closed. When people are in contact with the loan officer, the tendency is for him or her to tell you that everything is going well. This might make you feel good in the short-term, but if there are any problems with your loan, this is where you want to find out about them. If you wait until you get to the closing table, you might lose your home and your money.

It would be best for you to find out who your loan processor is. Only he or she have direct access to your file and know what is going on every step of the way. Find out the name and direct extension of your processor, and keep in touch. Do not pester the processors every day, because they are human, after all. Your processor will have the best idea of how your loan is going, and what problems may arise. If you find out about these problems now, you can rectify them right away. If you leave everything to the lender, they might drop the ball while telling you that everything is fine. When you find out that there are problems, you can pull out and find another lender. You want NO SURPRISES at the closing table.

At any time during the Processing phase of your loan, your processor can submit your file to the Underwriting department. Your file is then assigned to an underwriter. In short, the underwriter makes the final decision on whether or not you are approved for the loan.

There is usually a minimum quantity of information needed before your file can be submitted to an underwriter. In a perfect loan scenario, a file that includes your signed application, RESPAS, credit report, complete income documents, title commitment, and finished appraisal are submitted, and that would be all that is needed to close your loan. However, in the real world, it takes time to do a title commitment and an appraisal, so your file may be submitted without these documents in order to get an "Approval with Stipulations." This jargon varies by lender, but it is essentially a way for the underwriter to say that your loan will close, provided that these stipulations (also known as "Stips") are met. In many cases, a file with complete income documents, application, and credit report will bring back only two stips: appraisal and title. Once these two documents are received by your processor, they are sent to the underwriter for a final review. If they meet his or her satisfaction, you are ready to close.

It is here that the processing is complicated. In the real world, your loan may come back with a variety of stips. Underwriters may ask for further income verification, an amended purchase contract, or a satisfaction of creditors, just to name a few.

TIP: Ask your processor or loan officer what "Stips need to be cleared" in order for you to close the loan. Tell them that you don't necessarily want to see what underwriting gave them, just a breakdown of the remaining stips. Hopefully, they can type this up and fax it to you. You can then determine what stips you can help clear, and what stips you don't have too much control over.