Kristin Abouelata - Home Loans asked:


There’s a bunch of important points to review when considering a mortgage. And a ton of paperwork to look over. So much so at times it can be quite overwhelming. A Good Faith Estimate is one document to consider, and many people focus solely on it. But, in 1968, our lawmakers wanted to make sure lenders made it clear to the consumers just exactly what they were paying and that this information was consistently disclosed lender by lender. And for that, we have the Truth in Lending document, created by the Truth In Lending Act and outlined by Regulation Z.

The Truth in Lending document, or TIL as it’s affectionately known in the Biz, tells the consumer a lot about what he/she is getting into. It tells so much so that it can confuse a person, too. Thus, it is important to know and understand what it tells you. It allows one to make an informed decision. A TIL should be part of the beginning of the loan process and the end. When it’s all said and done, a mortgage customer should have reviewed an estimated TIL before closing, and then have also signed his/her final TIL at loan closing. The information found on the estimated TIL shouldn’t be too far off from the final TIL. If it is and you don’t understand the explanation for it, it’s time to put on the brakes.

A TIL will reflect your loan amount, interest rate and the amortization of your loan. A TIL comes in a standard layout, and most TILs will look the same from a distance, though there may be a few variations, like a payment reflection, lender’s logo, etc. But the nuts and the bolts should be identical in format.

The main thing you notice about TILs is they all have four boxes containing numbers stretched across their horizon. These boxes don’t mean much to you until they’re explained. But these are important numbers, which is why they are so blatantly highlighted in these little boxes. They shouldn’t be brushed off. If the TIL is an estimated or intial TIL, you’ll see a little “e” by the numbers in the boxes. Pretty straight forward - “e” means estimate. The final TIL you sign at closing should reflect all the numbers on your HUD-1 settlement papers and the “e” should be gone. That means you’re signing the final, real McCoy that is calculated by your final numbers.

The first box on the TIL reflects the Annual Percentage Rate (APR) or cost of your credit expressed as a yearly rate. Don’t panic, this rate is not your interest rate. It is the rate that the closing costs are actually costing you annualized over a year, and generally it is higher than your interest rate. However, if your mortgage is locked at a 5% interest rate, but your APR rate is 10%, you should reconsider the deal or get a second opinion. You’re paying too much.

The second box is the Finance Charge or the dollar amount the credit will cost you. It is the total amount of interest calculated at the interest rate over the life of the loan, plus Prepaid Finance Charges and the total amount of any required mortgage insurance charged over the life of the loan. The third box reflects the Amount Financed or the total amount credited to you on your behalf, minus Prepaid Finance Charges.

The fourth box is the one that gets most people’s attention - the Total of Payments. It’s the amount that a customer will actually pay back in principal, interest (and mortgage insurance, if applicable) if they keep the loan for the full term and stick to the outlined amortization schedule. Ouch. People find this number a little incredulous. I guess it really sends it home that mortgage lending is a business, and some company is going to make some money from it.

There are three other things on a TIL I like to point out to a customer. One is the late payment penalty. People need to know what it will cost them if their check gets to the Servicer late. It’s usually 4% or 5% of the monthly principal and interest payment, depending on the loan type. Another VERY important feature a lender should point out to a customer is if there is a PRE-PAYMENT penalty on the loan. A pre-payment penalty means that if you pay the loan off before a pre-determined time, you pay for the luxury of doing so. Make sure you know the terms of the pre-payment penalty if you should have one, and that you are certain you can live with it. They can be quite costly. Finally, the TIL tells you that should you pay off your loan early, you won’t be entitled to any of your closing costs or interest being refunded. In other words, don’t expect to get any of the money you have already paid back.

Simple enough, right? To tell you the truth, it is confusing, even for a mortgage lender. Take time to understand this document and ask all the questions you have regarding it. Don’t be shy.



DUNCAN

Kristin Abouelata - Home Loans asked:


When a mortgage underwriter reviews customers’ credit profiles and income histories, what’s happened in the past two years holds a lot of weight as to what their future will be.  And what the future may hold for them doesn’t always count for much at all. At least when assessing risk in mortgage lending. 

 

If your future is difficult to substantiate, your past history is what a mortgage underwriter considers.  That’s why it can be difficult these days for newly self-employed people to obtain loans.  If you start a new business, you have no track record.  Couple this fact with the other odds reflecting it’s highly likely you’ll lose money your first year in business, and you can see why you have to be out of the gate two years before you’re not considered a risk anymore.

 

The history theory is also a hard lesson for people who earn tips as a large part of their income to learn   A lender will ask these individuals what Uncle Sam has on record for their earnings for the last two years.  There’s no way to soundly document what they’ve earned year to date, except for base pay and their two year history.  So, if they’re making a ton of more money in their third year of business, typically a lender can’t substantiate the marked difference in income.  The same can be said for people who are self employed and have multiple business expense and depreciation deductions.  Lenders count the bottom line when the dust settles.  And again, a lender can’t look at year to date earnings to offset what’s on historical record.  Year to date earnings might strengthen your profile, but basically, it is what it is. 

Of course, your credit score is a reflection of your past.  It’s a great indicator of what your future will be.  I guess that’s pretty self explanatory when you think in terms of lending.  Statistics prove that this number pretty much tells a lender how likely it is you’ll pay on time in the future.  It’s a good crystal ball, in general.  So if you have an iffy credit score, you need to work to improve it, and reapply for a mortgage in the future.

Sometimes a lender can look to the future, and it’s to your advantage.  For instance, if you have a debt, like a car payment, that will be completely satisfied in 10 months or less, it won’t count against you when calculating your monthly debt.  The same can be said for child support or alimony that’s about to expire (or at least the legal obligation is about to expire). Likewise, certain payments sometimes won’t count if they’re deferred for a couple of years, like student loans.  In addition, generally, a person can just have started a salary job and provide a pay stub after loan closing.  However, some programs may be more stringent than others where these areas are concerned.

You see, a lender is going to always count what can be verified, not what the future will hold - no matter how rosy it appears.  And most programs these days would require that an applicant be prepared to verify the information, even if the underwriter doesn’t ask for it.  So, be informed when you consider buying a house.  Your credit history can mean the difference between an A+ and a C- in your interest rate secured and ability to obtain a loan.



LEOPOLDO