What is good credit?

Question:
You're always writing about how important a credit rating is, but just what
constitutes good credit? I understand this is very important to the lender
since we're using only a small down payment on our house purchase.--CL.

Answer:
While interpretations of credit and risk can vary from lender to lender,
there are guidelines which most lenders focus on set by FNMA/Fannie Mae in
the secondary market as indicators of good credit. These are particularly
important if the borrower is using only a small down payment since the
lender's risk is higher.

In reviewing the borrower's credit for the past twenty-four months, the
lender showed an "intent to have good credit" in the following categories:

--Revolving credit: (ie. credit cards) No payments 60 days or more past due
and no more than two payments 30 days past due;

--Installment credit: (ie. car loans) No payments 60 days or more past due
and no more than one payment 30 days past due;

--Housing debt (ie. mortgages and rent) No payments past due. This can be
proven by the borrower's canceled checks for the past 12 months, or loan
payment history from the mortgage servicer.

In all categories, all late payments must be explained.

Contrary to popular belief, good credit does not have to mean perfect
credit. But it must not contain any adverse or derogatory information like
collections, judgments, or recent bankruptcies.

What is compensating factors?

Question:
Our friends were marginal in qualifying for a home loan (just like we are),
but they said they got the loan because of something the lender called
"compensating factors".

What are these and how does the lender use them?--AG

Answer:
Compensating factors are considerations lenders use to justify higher
debt-to-income ratios for mortgage loan qualifying. For example, if the
lender sells the loan as an investment to Fannie Mae in the secondary
mortgage market, that loan might be acceptable even with high ratios if one
or more of the following conditions exist:

1. The borrower makes a large down payment;

2. The property qualifies as energy-efficient;

3. The borrower has shown the ability to pay more of his income to housing
expense (ie. previous high rent payments);

4. The borrower has a track record of maintaining good credit or a debt-free
position and can accumulate savings;

5. Earnings are likely to increase and advancement is likely due to strong
education or job training;

6. The borrower's net worth is substantial.

Can a veteran with a bankruptcy obtain a VA loan?

Question:
If you're a qualified Veteran, but have a bankruptcy on your record, can you
still obtain a Veteran's Administration loan?--OP

Answer:
Each bankruptcy situation is handled based on its own circumstances. In
general, the Veteran's Administration (VA) would like to see that the
bankruptcy has been discharged at least 24 months and the prospective
borrower's credit re-established.

Since the lender wants to be fairly sure that bankruptcy won't recur, a
detailed statement outlining what caused the bankruptcy (ie. death in the
family, job layoff) will be required. In addition, the bankruptcy judge may
be asked to approve of the new mortgage loan.

Your best bet for securing a loan is to contact a lender who does a high
volume of VA mortgages and be upfront about the circumstances. Be sure to
prequalify with him/her prior to starting your house hunting.

ARM Margin...What is it and how does it work?

Question:
We just bought a new home and got a great rate on an Adjustable Rate
Mortgage. Someone asked what our margin was on the loan, and I had to admit
I didn't know. What is a margin and what does it have to do with the
interest rate?--JK

Answer:
The margin represents the lender's cost of doing business and profit, and is
added to the index to create the interest rate.

Each lender determines the margin for a particular loan program prior to
making the loan. While margins can vary widely, a typical margin usually
falls between 2.5% and 3%, with the greatest majority of loans near the
2.75% mark.

The lender (based on the guidelines of the investor purchasing the loan in
the secondary market) determines which index is used. An index is a
benchmark or measure of the economy. Typical indices you've probably heard
of include Treasury securities and Cost of Funds (an index from the Federal
Home Loan Bank).

You'll find the margin used for your loan in your loan disclosure documents.
Then add it to the index to determine the loan rate. For example, if your
margin was 2.75% and the index was 6%, your interest rate would be 8.75%.

It's interesting to note that while many borrowers actively shop for a low
initial index, they should shop just as strongly (if not more so) for the
margin since it doesn't change during the life of the loan!

Based on a lender's practices, he/she could give you a lower introductory
rate, sometimes called "teaser rate", to entice you to take the loan. But
when it comes time for your loan to adjust (ie. semiannually, annually,
etc.), the payment adjustment would be based on the index at that time PLUS
the margin stated in your loan documents.

How do you obtain federal gov. booklets RE: normal homebuying costs

Question:
Does the government have any booklets that tell you about normal costs when
you purchase real estate? On the last home we bought, we didn't have much of
an idea if we were being treated fairly, particularly when it came to all
the costs we had to pay. Where could we get that information? --B.B.

Answer:
While there are many sources of information, some of the best come from the
federal government. There are currently ten booklets on home building,
buying and financing, ranging from eight to fifty pages in length. Prices
are nominal (fifty cents to a dollar fifty each), and include titles such as
"Settlement Costs", "Wise Home Buying", and "A Consumer's Guide to Mortgage
Refinancing".

To obtain a catalog free of charge, write to: Consumer Information
Center-R., P O Box 100, Pueblo, Colorado, 81002.

Can a widow use a VA loan again?

Question:
My husband and I purchased a home in 1976 using his VA eligibility, but lost
it two years later to foreclosure. I am now a widow and would like to
purchase a home using his VA benefits (he died several years ago of a
service-related injury).

What are my chances of getting a loan; and if I do apply for financing, do I
even have to bring up the subject of the foreclosure? -- D.C.

Answer:
Be upfront about the foreclosure. If you don't, the lender is sure to
uncover it since it's likely to be part of your credit history.

When you and your husband signed the paperwork for the first VA loan, you
agreed to indemnify the federal government against default. Even though the
lender made the loan, those funds were guaranteed by the federal government.
The Veteran's Administration has a right to collect any loss incurred in the
foreclosure, including attaching the veteran's pension, social security
income, or VA benefits until the loss is paid. The Veteran's Administration
can advise if there is any outstanding claim.

Be well prepared prior to any loan application appointment. Prepare to give
full details about why the foreclosure occurred, and why you are a strong
credit risk today. Check your credit at a local credit reporting bureau to
make sure it's without errors. A foreclosure remains on a credit report for
seven years, (but may not automatically drop off), so disclosing the details
to a lender will be paramount to receiving a second loan.

What are the pros & cons of a 15 vs. 30 year loan?

Question:
My wife and I have good income and are ready to purchase our first home.
We're a bit confused as to whether we would be better to get a fifteen year
or thirty year loan. What are the benefits of the shorter loan term?--AA

Answer:
The most obvious benefit would be the amount of interest saved with a
fifteen year loan. For example, the total interest over the life of a
30-year loan of $100,000 at 10% amounts to $215,929.17, while total interest
on a similar 15-year loan is $93,271.41----for an interest savings of
$122,657!

But interest isn't the only consideration. The amount of time you plan on
holding the property is important. Statistically, most loans retire in less
than seven years, thus making your interest savings between the loans in our
example less than $7,000. Also, there would be less mortgage interest to
deduct come tax time. And when you consider that the monthly payment in our
example is $197.04 more on the fifteen year loan, that monthly payment
difference invested at 8 percent could accumulate over $47,000 for you over
the 12-year projected loan life.

You mention that your income is good so the higher payments of the 15-year
loan may not be a problem for you. But it could be a bit tight should one of
you lose your job or emergencies arise that require cash. Additionally, if
you don't have six or more months of financial padding to fall back, you may
be better off with the lower monthly payment available on the thirty-year
loan.

A mortgage lender will be glad to pencil out the options for you using
various payment schedules. If you find that the 30-year loan suits you best,
ask the lender if prepayments are allowed to reduce the principal. This can
cut years off the loan, especially when applied early on in the mortgage.

What are the pros & cons of ARM?

Question:
Since we think adjustable rates look good, we're considering using an ARM to
finance our new home. When do they make sense for a borrower?--YP

Answer:
Adjustable Rate Mortgages (ARMs) are like any other type of financing---they
must meet the needs of the individual purchaser. Obviously, since your loan
payment may adjust throughout the life of the loan, you need to ask several
questions before getting into an ARM.

First, will your income rise to meet potential upward adjustments in the
payment? Although ARM rates adjust on a periodic basis (ie.annually), most
loans have maximums, or caps to which these adjustments can occur. Caps can
apply to either the maximum amount of interest charged, a ceiling on the
payment, or both. Make sure you're aware of the caps for the loan you apply
for.

Second, how long do you plan on owning the property? Statistically, ARMs may
make the most sense for short-term ownership. This is because you can
usually find initial interest rates well below those of fixed-rate loans and
sell the property before any substantial payment increases can occur. As a
broad rule of thumb, if you can save at least 2.5% interest between the
initial adjustable rate and the fixed rate, and you're going to hold the
property for less than four years, it may pay to use an adjustable rate
mortgage. The lender will be glad to show you what each loan considered will
cost you.

Third, shop for the best overall program. You need to consider which index
the lender is using, the amount of the margin (or lender's cost of doing
business) being added to the index to create the interest rate, as well as
any additional loan fees. These may be fees for originating the loan or the
privilege of converting the loan to a fixed rate at a later date.

Lastly, be sure to ask the lender to explain the "worst case scenario" of
the ARM you're considering. This shows you the maximum adjustments possible
under the worst possible interest increases. If you can't live with what you
see, don't take the loan.

How do you use pledged assets for greater borrowing strength?

Question:
My family and I have been transferred out of state and have found a new home
to purchase. Since we're only marginally qualified for the new loan (plus
making payments on our old home for a time) and we won't be moving in for
three months, the lender is hesitant to close the loan unless we can show
some extra strength as a borrower. Can you suggest a way around this?--BI

Answer:
Lenders need to be convinced that you're a strong borrower, especially when
occupancy won't occur at closing. Your situation is compounded since you
will be starting a new phase of employment, and will have two mortgage
payments to make for a while.

Here's one idea---use pledged assets to strengthen your position with the
lender. This means that there would be extra security (collateral) available
in a third-party escrow account if the loan gets in trouble.

Here's how it works. One party in the transaction places funds equal to
three months of your new loan payment in the account. (To cover the time
before you move into the new house.) This can be done by the seller or third
party to the sale (maybe even your employer in this case). The escrow
instructions state that the funds are to pay the lender for any delinquent
loan payments and late fees during a specified period of time (ie. the first
twelve months of the loan.) If the loan is in good standing at the end of
that period, the funds (plus any interest accrued), will be returned to the
party placing them there. It's a win/win situation. The lender has extra
security, the party funding the account gets the money back plus interest,
and you get your home!

The extra security doesn't have to be cash. It could be some other type of
collateral agreeable to the lender such as stocks, bonds, or certificates of
deposit.

Can a seller carry back financing?

Question:
We are a little short in our down payment and closing costs for a 90%
conventional loan. Is it possible to have a seller carry financing on part
of the purchase price and get a conventional loan for the balance?- K.K.

Answer:
There are several reasons why your idea may make economic sense for both you
and the seller.

The secondary market will purchase loans from lenders based on first
mortgages of up to 75% of the appraised value with a 10% down payment from
you, while the seller carries 15% of the purchase price on a second
mortgage. You reduce your down payment considerably, while the seller gets
the proceeds from the 75% loan, less his costs of sale.

You and the seller would negotiate the terms of the second mortgage (perhaps
at interest less than what you're paying on the first mortgage), and the
seller would increase the yield on his investment by receiving interest.

Since the first mortgage is less than 80% of the appraised value of the
property, private mortgage insurance may not be charged by the lender; but
the lender will ask that you financially qualify to repay both the first and
second mortgages.

Some of your closing fees may be reduced since some of the lender's costs
(ie. origination fees) are based on the amount of the first mortgage.

Make sure that you and the seller use attorneys who specialize in real
estate to draft the documents on the seller financing. You will be living
with these terms, conditions, and clauses for the life of the second
mortgage so it's imperative you shop for quality documents, not just low
fees.

All information provided is deemed reliable but is not guaranteed and should
be independently verified. For more Information or if you have any comments
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