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Selecting a Mortgage Lender
Hosted by Kenneth R. Harney
Syndicated Columnist
Thursday, March 29, 2001; 1 p.m. EST
Lenders are forever saying how easy it is for anyone -- regardless of credit history -- to borrow and buy a home these days. But are the claims really true? And are the loans fair and affordable? What should consumers look for in a lender as they buy real estate? And are online lenders all they're cracked up to be?
Kenneth R. Harney is the author of the nationally syndicated column "The Nation's Housing," and understands the ins and outs of loans, mortgages, tax laws and legislation important to both buyers and sellers. He was online to answer your questions Thursday, March 29.
The transcript follows.
Harney is the managing director of The National Real Estate Development Center, which sponsors professional education conferences for public agencies, developers, mortgage executives and real estate attorneys. He also runs his own consulting firm based in Chevy Chase, Md., and is co-founder of the Housing and Development Reporter, published by Warren, Gorham & Lamont, Inc. An honors graduate of Princeton University, Harney did graduate work at the University of Pennsylvania. He has written two books: "Beating Inflation With Real Estate" (Random House, 1979) and "Exchange Your Real Estate: Why Pay Taxes?" (National Real Estate Development Center, 1993).
Editor's Note: Washingtonpost.com moderators retain editorial control
over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
Arlington, Va.:
Are real estate agents a good source for recommendations of mortgage lenders? Or are there potential conflicts of interest?
Ken Harney: Yes, real estate agents CAN be good sources of information about lenders active in your market. I just don't think you should use your agent as your sole source of information. Go to the web where sites like lendingtree.com offer multiple lenders all competing for your business. Shop aggressively.
Arlington, Va.:
What are the pros and cons of using a mortgage broker? What are questions one should ask when interviewing prospective brokers?
Ken Harney: Mortgage brokers can be outstanding sources of information about the different types of loan products available in your area. What you need to know about most brokers, however, is that while they are motivated to connect you with a lender, they generally are not bound legally to get you the very best deal available. One useful technique is to discuss you situation and needs with multiple brokers, that way you can begin to get a sense of the range of products and rates available.
Bethesda, Md.:
Ken,
I have already chosen a couple of loan brokers based on their loan origination costs. The last thing is the rate itself -- how do I know if the broker has found me the best rate possible? Do I have to go to both brokers simultaneously (when I find a house) and see what rate they quote (and they offer no guarantee from one day to another)?
Thank you.
Ken Harney: Rates can change multiple times each day. I would suggest that you ask the broker whether this is the best rate and fee package available for the loan you want. Without being in the business, you'll probably never be sure that you got the "very best" rate that day. As to going to multiple brokers, definitely, make them compete against one another.
Gaithersburg, Md., 20878:
Hi Mr. Harney,
I have two questions concerning about real estate's mortgage:
1. Is it better to go to the bank for the loan or can I go with the broker? And what is the best way to get a low interest rate in the D.C. metro area?
2. I got my FICO score from Equifax, and my score post 690. Is it an average score? and what is the score to get the current interest rate from the lenders?
Regards,
Saaxx
Ken Harney: Shop as many lenders as you can. As to your FICO score of 690, that's pretty good . . . and should get you very competitive mortgage interest rate quotes and fees.
Alexandria, Va., 22308:
I am 60 years old, have a mortgage of $150,000 and my home has been going for $490,000 or $500,000. I am paying a 7.6 interest rate. I am single and wonder if I should get a new mortage to bring the rate down. I now have 30-year mortage paying about $1,500 [per month]. What do you think?
Nancy Miller
Ken Harney: Assuming your credit is good, with rates in the marketplace at 6 3/4 at the moment, you sound like a good candidate for refinancing. The rule on refinancing is this: Can you pay for the costs involved of the refinancing -- the title, the closing costs, etc. -- within 24 months? If you can, then refinancing now should be worth it.
Washington, D.C.:
Good afternoon, Mr. Harney. Will it be wise for me to refinance now since the interest rate has gone down somewhat? I am on an arm at 13.99 percent. Sometime ago I was informed by my financial institute that my interest will go up in another six months.
My problem is that if I refinance within three years of my contract, which ends this year October 2001, I'll have to pay a penalty of six months of interest (about $2,000). So shall I wait until October or just go ahead and refinance for a 30 years fixed at a lower rate? Thank you for your time, Mr. Harney.
Ken Harney: Since the key to refinancing is paying off the costs of refinancing with savings on a lower rate within a relatively short period of time, you need to get hard estimates of the rate that you can refinance into. A 13.99 percent arm is horrendous! So is your $2,000 pre-payment penalty. If you can get out of this loan, do so immediately.
Rockville, Md.:
We are planning to refinance our current house at its current balance, get a small home improvement loan, and finance a vacation property. We have "excellent" credit. We were intending to use one lender to save paperwork. Should we use separate lenders instead?
Ken Harney: Why not pull out more money on your refinancing to finance the vacation property? Why bother with a second lender and a home improvement loan?
Alexandria, Va.:
Hi --
What is the minimum amount of cash you need for a down payment, fees, closing costs, etc. My wife and I have good credit and will both be starting high paying jobs in August, but no savings -- do you think we could qualify for a very low down payment mortgage, and if so, is that better than trying to save for a 20 percent down payment?
Thanks
Ken Harney: It's probably not a bad idea to wait a bit, and accumulate some savings before buying. But if you find a place you love right now, there are many mortgage programs that permit anywhere from nothing down to 5% down for people with good credit. Bear in mind that private mortgage insurance comes with all these loans and the monthly cost of low downpayment loans are considerably higher than loans with 20 % down.
Greenbelt, Md.:
Bait and switch rules don't seem to apply to these mortgage brokers -- can you give me any advice for getting the lowest rate? My broker offed me a float down but then said that 1/8 isn't enough to float me down --- How do I learn the rates that the lenders are giving the brokers?
Ken Harney: You probably can't get the rate sheets lenders send to brokers. However, by rigorously shopping the net, and rigorously shopping with brokers, mortgage bankers and banks, you'll develop a pretty good idea of the current cost of money.
Washington, D.C.:
My husband and I have just started saving for the purchase of a home. We have little saved today, but with a rigorous saving plan we could accumulate a significant downpayment by the end of this year or early next year. I envisioned that at that time we would begin searching in earnest for a home. BUT -- the current low interest rates are tempting us to speed things up. With good income and great credit histories, I'm confident we could qualify for a zero-low downpayment loan right now. The questions: (1) Would you recommend waiting until we have accumulated a significant downpayment (10-12 months) before buying a home or would you recommend moving ahead now given the current low rates? (2) Is there such a thing as "locking-in" to a current low rate and then purchasing later? (3) Are there any other options?
Ken Harney: There's probably a lot to be said for waiting to accumulate the downpayment. It's entirely possible that a year from now, housing prices will have levelled off compared to today, and may even be more affordable.
You can shop various mortgage brokers and mortgage bankers, and see how long a lock they'll give you. But no one is going to guarantee you today's low rates four months from now, when they're much higher
If you find a great deal on a house now, a house you really love, you probably should explore a low downpayment option. It will cost you somewhat more per month, but in the long run, you'll have the house that you wanted when you wanted it.
Washington, D.C.:
I recently sold my condo.I would like to qualify for a new mortgage (I filed Chapter 7 last September) but don't know where to start the process of locating a broker or lender.
Ken Harney: If I understand your question, it sounds like you want to buy another house to replace that condo you sold. If so, most mortgage brokers can probably connect you with one or more "subprime" lenders who specialize in financing homebuyers who have had credit difficulties.
Washington, D.C.:
What does your crystal ball say about where rates are headed. I have a current loan at 7.625 percent, and want to refinance, but not if rates are likely to keep going down. What do you think?
Ken Harney: My crystal ball is usually somewhat cloudy but I do think that we have not seen the bottom of the current rate cycle. If you see rates move a little lower in the coming months, I would start the refi process. Because no one--even someone with a real crystal ball--can predict the exact point at which rates are the lowest.
Alexandria, Va.:
Hi Ken --
I am getting ready to buy a home for the first time. As part of my preparation for applying for a mortgage, I ordered and received copies of my credit report from all three major credit bureaus. There was a lot of information on the reports that was incorrect or out of date (a collection listed as unpaid that was actually paid several years ago, an account listed as 120 days past due that should actually have been a closed account, etc.). My question is twofold: first, I've got written confirmation from each creditor about any corrections or updates that needed to be made -- will those written confirmations help to increase my FICO score (it can take months before the updates make it to the credit bureau, and I want to make sure I'm scored based on correct, up-to-date info)? Second, do FICO scores take into account the length of time it's been since there was any negative activity on a particular account (i.e. if I had a late payment in 1996, would that be weighted the same as a late payment in 1999 or 2000)?
Ken Harney: Regarding correction of FICO scores, some credit bureaus now have arrangements with the national credit bureaus allowing them to correct your score virtually overnight. Ask your lender or broker whether they are familiar with this new service. On your second question--the FICO program remembers back a number of years and factors in negative activity on your accounts. If you never disputed the problems with your credit history, you can't expect the FICO score to ignore them. By the way, congratulations on getting your credit report in advance of applying for a mortgage--good thinking.
Springfield, Va.:
Where do I begin to find a lender? If you don't have the best of credit histories, how do I know I will get a "fair" opportunity as far as interest, etc., are concerned?
Ken Harney: You should first pull your credit report and get your FICO score so you know what you look like from the point of view of a lender. Then contact several mortgage brokers active in your area. Mortgage brokers tend to be your best bet if you have any damaged credit history.
Germantown, Md.:
I have recently gotten married. My husband and I had some issues with our credit ( in college nothing current ). I have been on a mission to "fix" our credit. This process has taken over a year. Now we are to the point we are cuurently saving for the down payment of a home (about 10 percent). Our debit to ratio is wonderful. We only have two cars. When will it be a good time to enter into the "buying process"? Should be wait an additional year?
Ken Harney: Congratulations on your credit turnaround. Sounds like you're ready to begin the buying process right now. Good luck.
Washington, D.C.:
Do excellent FICO scores reduce your cost of borrowing? If so, how can you use a good FICO score to get a better rate -- as I have been shopping around, the lenders have been quoting me rates up front, even before I fill out the application and they get the credit report. I don't see how they take the credit history/FICO scores into account in setting the rate. Thanks for your help.
Ken Harney: Yes, a very high FICO score can get you a lower rate, provided the lender uses what is called "risk-based pricing". In the Washington, D.C. area, one major lender who does use this approach is Chevy Chase Bank. There are probably others, and any competent mortgage broker can put you in touch with them.
Maryland:
OK, the Fed has been lowering interest rates but it doesn't seem to affect mortgage rates? Why?
Ken Harney: Mortgage rates are tied most directly not to short term rates--the rates the Fed affects--but to 10 year bond rates.
Washington, D.C.:
How long would I have to wait to get a new mortgage if I have a foreclosure and/or bankruptcy on my credit report. I'm more concerned about the foreclosure situation. The property was sold at a value higher than the foreclosure amount. Therefore, the balance owed by me is zero.
Ken Harney: The good news for you is that there are lenders who want your business right now, even with your prior credit problems. As I have said several times today, mortgage brokers are your best bet for locating those subprime lenders. Don't be mistaken however: you are going to be quoted rates that may be well into the teens, plus substantial fees. Good luck.
Richmond, Va.:
Now that my mortgage loan has been sold to someone based out of state, (Florida) how difficult will it be for me to get rid of my PMI payments? I already have more than the required equity for it to be dropped.
Ken Harney: The sale of your loan has no effect on your rights to cancel pmi. Ask the new servicer to send you information on its policies regarding cancellation of pmi. If you have the required amount of equity--and that can range from 25-20% of the home value depending upon the investor involved--your servicer is required to cancel.
Jamison, Pa.:
My husband and I are moving to Virginia. We will arrive next week to look for a property. The brokers tell us that we should have a pre-approved morgage in our hand before we arrive. Is this possible to get over the internet or is this ony through a bank.
Thank you
Ken Harney: Via the internet you can probably be pre-approved today. All you will need to do is submit your financial data and credit information. As to whether you actually need a pre-approved loan to buy a house, that depends on how "hot" the neighborhood is where you want to buy. Obviously, a pre-approval in hand gives you a leg up if you are competing against other bidders at the same price who don't have a pre-approval.
Washington, D.C.:
Good afternoon,
I recently attended a home buyer conference. I was a credit report with my FICO Score of 562. I have excellent credit but way too much and most of my cards are at the limit. How do you suggest I go about raising my score?
Thanks
Ken Harney: I have two suggestions. First, visit www.myfico.com and use their individualized guidance service on how to raise your score. Second, it sounds like your low score is the result of carrying high balances on too many cards or credit lines. The answer is to find ways to pay down some of those balances.
Arlington, Va.:
Why is it that lenders don't tell you that when you refinance that you are getting a new loan for a full 30 years. This seems deceptive in that the borrower may assume that the new monthly mortage is a reflection of the rate, only to find out later that it is because the loan was extended back to 30 years. It is a psycological thing for me to know that I have 28 years left, but I want to do whichever is best financial decision.
Bottom line, is it better to go with a shorter mortgage with a higer payment, or longer term with smaller payment (so that you can pay towards the principle)?
Ken Harney: Shorter term mortgages require higher monthly payments but deliver you a free and clear house sooner. Seems to me if you have the cash to pay down your principal sooner, why not do it. You can even make additional payments towards principal to speed up your amortization on your current loan.
Fairfax, Va.:
Hi Mr. Harney!
I bought my house last year. I have an FHA mortgage and I pay PMI. How do I make the case for getting rid of the PMI? The comparable houses in my neighborhood are selling for $30,000-$40,000 above what it was last year.
Ken Harney: As a borrower with an FHA loan, you are not paying PMI (private mortgage insurance). You are paying federal mortgage insurance. Under current rules, you have no right to expect cancellation of your FHA mortgage insurance premiums, no matter what your equity stake may be. If you really want to get rid of your monthly insurance payments, the best way is to refinance out of the FHA loan into a conventional mortgage.
Arlington, Va.:
My husband and I recently bought a townhouse. We secured a subprime loan, with a rate of 10 percent, because of a three-year-old (almost four years, now) bankruptcy. Our broker told us that we should be able to refinance without any problem at a lower rate, once we demonstrate over a period of time that we can pay the mortgage.
As the mortgage contains a one-year prepayment penalty, we had planned to start looking at refinancing right after the year is up. Is one year long enough for us to demonstrate our mortgage payment history? Or will lenders want to look at two or three years?
Ken Harney: One year of on-time payments is sufficient for some lenders, including some big-name mortgage bankers. I would shop two or three mortgage brokers, and ask them to identify which lenders will allow use of 12 months of on-time payments as evidence of a better credit standing.
Reston, Va.:
What is considered a "very high FICO" score? This is in relation to the better rates from Chevy Chase Bank. Thanks.
Ken Harney: I believe that in the case of Chevy Chase, a high FICO score is considered 740 and above. FICO scores go as high as 850, but most lenders who use risk-based pricing use cutoff points at 720 or 740. Anything above that, you look very good.
washingtonpost.com:
That was our last question today. Thanks to Benny Kass, and to
everyone who joined us. Feel free to submit your questions to our other columnists, and we can re-submit them as well.
Stay tuned this week for the Online Homebuyers Conference:
Bob Bruss on buying and selling real estate, Friday, March 30, at 1 p.m. EST.
In addition, Katherine Salant talked about new home construction and customization on Monday, March 26; Barry Stone talked about home inspections on Tuesday, March 27; and Benny L. Kass talked about real estate law on Wednesday, March 28..
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