Preapproval Letters Defined

January 19, 2007 by 10 Comments

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The preapproval letter is a tool typically drafted by a loan originator to be used by a buyer’s real estate agent when presenting an offer on a property.   The letter may be in the form of a certificate or be an actual letter on the lender’s letterhead.   The preapproval letter is intended to assure the seller and the listing agent that the buyer has been buyer has been approved by the lender and therefore accepting an offer from this buyer, there should ideally not be any financing issues with the buyer.

 

When I prepare a preapproval letter, it usually contains the following (depending on the program):

  • Effective date.
  • The borrower’s names (who is approved for financing).
  • The sales price and loan amounts they are approved for.
  • The type of financing is confirmed (ex. Conventional, FHA, etc.)
  • Credit has been reviewed.
  • Employment and income has been confirmed.
  • Down payment and closing cost have been verified.
  • Any closing costs that are being requested to be paid for from the seller.
  • Any item the preapproval is subject to (such as satisfactory appraisal, title, complete purchase and sale agreement, etc.).

If these items have not been actually verified with proper documentation, then a buyer has been prequalified—not preapproved.  BIG DIFFERENCE.  Being prequalified essentially means that a verbal interview has been conducted without providing all of the necessary supporting documents (pay stubs, W2s, bank statements—again, depending on the type documentation required for the specific loan “full doc” to “no doc”).  In addition, a Good Faith Estimate does not constitute a preapproval, it does detail the proposed loan scenario.

 

The preapproval letter does not contain private information such as a buyer’s credit score or their additional assets.   It is a sales tool for the buyer’s agent and if there are multiple offers presented on a home, having a strong preapproval letter is an advantage.   This is one reason why it is crucial for buyers to become preapproved before they begin shopping for their next home.   Many listings agents will not even consider an offer unless the buyer has been preapproved.    

 

 

The preapproval letter is generally effective for 90 days a specific amount of days, typically when most lenders consider the credit report “expired”.   Updating a preapproval letter is simply re-running the credit and possibly obtaining most recent income and asset documentation (paystubs and bank statements).    On occasion, the buyer’s agent may request a revised preapproval letter if they are presenting an offer on a home that is priced for less than what the buyer is approved for and if they are asking for closing costs.   

 

 

Real estate agents may also consider who the preapproval letter is from, and they may contact the lender to confirm the buyer is indeed prepproved and not just prequalified.   Many agents will tell you that the preapproval letter is only worth the paper it’s printed on.   This is also why it’s very important to be selective with lender you work with…it could possibly impact whether or not your offer is accepted on your next home.

 

If you’re considering purchasing a home located anywhere in Washington state and need a preapproval letter, I’m happy to help you!

 

EDITORS NOTE:  This post has been updated since credit reports are no longer “valid” for 90 days with most lenders.

 

Filed Under: Credit Scores and Reporting, Mortgage, Real Estate Agents, Residential Purchase Tagged With: ,

Not a Good Option

January 16, 2007 by 7 Comments

Yesterday, one of my clients asked me about Pay Option ARMs.   These loans are Mpj034192600001_1 probably the most heavily advertised products promoted on the radio.   I cringe every time I hear the announcer boast about the low start rates of anywhere from 1 – 3%.  Pay Option ARMs are marketed by many different names, such as pick-a-payment or cash flow ARMs.   

A newer Option ARM program features a fixed period for the minimum payment and a fixed rate for a five year term.    Every month, when the mortgage payment is due, the borrower has the choice of what kind of payment they would like to make typically based on four different selections. 

Here’s an example of what a fixed period Option ARM could look like.

Option 1:  Minimum Payment–an interest only payment at 3% under the note rate available for the first five years of the loan (NEGATIVE AMORTIZATION).

Option 2:  Interest Only–an interest only payment based on the note rate available for the first 10 years of the loan term.

Option 3:  30 Year or 40 Year Fixed–A full principle and interest payment amortized over either a 30 or 40 year term.

Option 4:  15 Year Fixed–A full principle and interest payment over a 15 year term.

Sounds great, right?  Wrong.  I know a lot of lenders offer this product.  And, at least this option ARM offers a controlled minimum payment for a five year term.  However, how many people are going to make a principle and interest payment when they receive their mortgage coupon? 

Negative Amortization (deferred interest is the nicer term) is the difference between your note rate payment (the actual payment due) and the minimum payment (the low teaser rate).   In this case, every time you opt to make the lower payment, the difference is tacked on to your mortgage balance.   There are ceilings in place that will prevent all of your equity from being gobbled up from your mortgage called “negative amortization cap”.   This loan particular program (option ARMs vary from lender to lender, and this is just one that we could offer, if I don’t persuade you otherwise) features a cap of 115%.    This means that once you’ve made minimum payments long enough to increase your original mortgage balance by 15%, your loan terms will change and you no longer have the minimum payment available as one of your options (this is referred to as “recasting”).

Option ARMs can also impact your credit scores for the worse.   Credit scoring modules give more favorable scores when balances are decreasing and worsen if balances are shown above the credit limit.   If your original mortgage is $200,000 and due to negative amortization, the current balance is $215,000 (for example) your credit scores will be dinged as it appears to the scoring system that you’ve extended beyond over your credit limit on your mortgage.

These loans may work for seasoned investors who do not plan on utilizing the minimum payment option unless, perhaps, they have a rental without a tenant.     However, the majority of homeowners who have Option ARMs don’t fully understand how this animal works or that they are trading equity for lower payments until it sneaks up on them.  It’s not a program that I recommend for my clients when there are so many better programs available that won’t jeopardize home equity.

Filed Under: Adjustable Rate Mortgage (ARM), Credit Scores and Reporting, Mortgage

Check It Out

January 13, 2007 by Leave a Comment

You have the right to access your own credit report once a year from the three main credit bureaus; Eurohawk_4 Experian, Equifax and TransUnion at www.annualcreditreport.com.  You probably have noticed the many different commercials on TV promoting this from various other sites.   Since it’s been a while since I’ve accessed my report from this site and because I’m promoting in my upcoming quarterly newsletter for clients to access their credit, I decided to do so this morning.   

Currently, I publish and mail my newsletter three times annually.   As a person can access their credit report from each bureau once annually, and there are three bureaus…I thought I should use my newsletter as a reminder for my readers to review their credit when they receive the newsletter.   In my upcoming issue, I’m encouraging people to access their Experian report.   In the following newsletter, a few months later, I’ll remind them to pull their credit from either TransUnion or Equifax (you get the idea). 

After answering a few security questions, you will have access to what is being reported as potentially negative, what is positive and who is requesting your credit information.  What you won’t find on the “free” report is your credit score.  The bureau wants you to spend an extra $5.95 for that AND they would also like you to sign up for their credit watch programs.   

One of the services I provide my clients is an Annual Review, which includes their current mortgage and financial plans along with a review of their tri-merge credit report which includes the 3 credit scores.  I still advise everyone to take advantage of the free report to keep tabs of your credit throughout the year.   

Oh…and before I forget…GO HAWKS!!!

Filed Under: Credit Scores and Reporting

The “R” Word

January 4, 2007 by 2 Comments

Resolutions.  I was not going to post New Years resolutions since they are everywhere.J0309664_1..however, I can’t pass up this opportunity.  Beyond the perennial lose 10 pounds, start excising, or stop smoking; here are a few goals to consider for your financial health.   I plan on revisiting these goals more indepth on future blogs…so I’ll try to be brief for now.

  1. Have an emergency fund established with at least 3 months of living expenses in an accessible account.   You can also use a HELOC for an emergency fund account IF you have the discipline to leave it alone.   A HELOC can be an excellent tool and should be applied for before you have an emergency situation (loss of employment, medical, or a tree landing on your house from sweet Mother Nature) and may not be able to obtain one.   In the event of an emergency, do you have your finances organized?   A recent article I read from the Financial Planning Association recommends having copies of all your pertinent financial documents in a binder that you can find quickly in the event you need to evacuate your home.

  1. Know your score, or at least what is being reported on your credit history currently.  Credit scores are not only used for determining what mortgage programs and rates you qualify for.   They also impact insurance, credit card rates and auto loans to name a few.  In addition, reviewing your credit will help determine if you credit is being used without your knowledge (identity theft).   You can visit www.annualcreditreport.com for a free credit report.   This is provided by the “big 3 bureaus” and it may not provide your score without paying an additional fee.  As you are allowed one report from each bureau annually, I would recommend that you pull your report from one bureau every four months to keep a constant monitor on your credit activity.  There may be simple ways to improve your credit score that you can determine once you have the information available.

  1. Create or review your Will.  I had a pretty cheesy will until I married last year.   My husband and I spent quite a bit of time with an attorney to make sure we have everything set up as we wish it to be instead of letting the government have it.   You would be surprised how easy, with home values, a retirement account, etc. that your net worth can grow.  Whether you have children or not, a will is a must.   After you have a will, it’s a good idea to have your information organized for your loved ones.   A great website to check out is www.readyornot.biz.

  1. Get a mortgage check-up.   If your mortgage has an adjustable rate (ARM), if you are paying private mortgage insurance (PMI) or if you have two mortgages on your home, this could be a great time to review your current scenario to see if you can reduce your monthly payments.   There is no sense in paying more than you need to, unless you plan on selling the home soon.   An Annual Mortgage Review is more in-depth than checking out your mortgage to current rates and products.

  1. Eliminate credit card debts.  It is too easy to fall into credit card debt.  Banks do not want you to ever pay them off with all the interest they earn.   Start with paying additional towards your smaller debts and then work toward the next one.  This is a slow process, but worth it.  It is boggling how much the interest can mount up on these types of loans with no tax benefit to you.  Improving  monthly cash flow reduces stress and allows you to eventually save for more important life items such as retirement and college.

I know this is a few days past New Years…however, it’s always relevant.   I wish you and yours a very happy, healthy and prosperous New Year.   Cheers!

Filed Under: Credit Scores and Reporting, Debt Restructuring, Financial Planning, Identity Theft, Interest Rates, Mortgage

2 Out of 3 is Bad…2 Major Credit Bureaus are increasing their costs to consumers.

December 13, 2006 by Leave a Comment

Effective January 2007, Equifax and Experian will increase the cost of obtaining consumer credit reports to lenders.  Currently, when you apply for a mortgage loan, the loan originator pulls a tri-merge credit report and, depending on the type of mortgage company the L.O. is employed by, may "shop" for lenders to find the best product and rate.   If a borrower has good to excellent credit, often times, looking for rates and products can be done verbally without having to provide a copy of the credit report until the loan is ready to be underwritten.   

For borrowers with challenging credit or situations that need mortgage help, loan originators will often times shop different sub-prime lenders for their clients.  This may involve running the loan scenario with that sub-prime lender and uploading the client’s credit report.   Currently, the original credit report that was pulled by the loan officer is "reissued" to the sub-prime lender for use in underwriting the loan at no additional expense to the consumer.  If the loan is especially tricky, it’s very possible to have to repeat this procedure with different sub-prime lenders to try to find a desirable loan approval.   Equifax and Experian are now going to charge a fee every time the credit report is submitted to a new lender (sub-prime or not).   

This will not only impact "sub-prime" borrowers.  I offer to re-lock my clients with another lender should interest rates improve significantly.  In this case, there will be additional fees, that do exist now, for reissuing of the credit reports.

Once again, the credit bureaus…well, at least two of them, are playing dirty pool.  There is no benefit to lenders or to consumers for the increase in the credit reporting fees.  It only generates significant additional revenue for Equifax and Experian and will hurt consumers who can afford the increased cost the least.

Any consumer can obtain a free copy of their credit report by visiting www.annualcreditreport.com.  This tool is for the consumers information only, it is not suitable for underwriting mortgage loans.

This is offered by the three major credit bureaus and you are allowed to obtain one report from each bureau per year.  I recommend that you pull one report from one bureau every four months until you have cycled through each credit bureau and then start over with the process.    There are many copy cat "free credit report" sites, this is the official one.    If you receive my Newsletter, which happens to be mailed 3 times per year, you could use the reminder I have featured in it.  If you would like to be added to my mailing list, including my Homes & Money Newsletter, please contact me with your mailing address.

Filed Under: Credit Scores and Reporting

Important Privacy Warning

November 30, 2006 by Leave a Comment

We recently became aware of a disturbing trend involving clients who have applied for a new mortgage.  The three major credit bureaus are selling your personal   information to hundreds of mortgage companies throughout the country as soon as your credit report is pulled from your mortgage lender. 

Your personal information is being sold without your consent or knowledge.  These mortgage companies are generally “fly by night” companies that operate several states away and are solely interested in offering you a “bait and switch” mortgage offer.  These lenders will call you repeatedly and mail you solicitation after solicitation in hopes of deceiving you.  They often offer terms that are too good to be true and misleading.   Not only is this practice deceitful, it opens the possibility to identity theft.  WAMB is currently working to get this dreadful situation remedied, in the meantime, consumers should take steps to protect themselves.    Here are a few suggestions on easy steps you can take.

Opt Out of Prescreened Credit Offers

This will stop creditors from viewing your personal credit information     without your written consent.  In addition, it will cut down on the junk mail (unwanted credit card solicitations).  This alone lowers your chances of    becoming a victim of identity theft.  You can opt out by visiting www.optoutprescreen.com or by calling 888-567-8688.  Try do this one week before having your credit ran by any lender, if possible. 

Add your phone number to the Do Not Call List

This can be done online by visiting www.donotcall.gov or by calling         888-382-1222.  Remember to make sure to add both your home and mobile cell phone numbers.  This takes 30 days to be in effect. 

At Mortgage Master, we work diligently to protect your privacy and personal information.  By following the steps above, you will protect yourself and lower your odds of becoming a victim of identity theft.  Please feel free to call us with any questions or concerns.  Our team is always here to help.

We take your trust seriously and will never be less than truthful in our dealings with you.  You can count on honest, straight forward mortgage recommendations from our team.  After all, the best compliment to our team is the referral of friends and family to our mortgage   practice.  This can only be achieved by servicing our clients with great care and respect. 

For a free report on additional tips on preventing identity theft, please send me an email.

Filed Under: Credit Scores and Reporting, Identity Theft
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