Frequently Asked Questions about Mortgage Loans @ CarolFlanagan.com

The satisfaction of having your own place gives you peace of mind and pride.
Your home gains in value over time. This appreciation helps create your own wealth.
You owe less taxes to the government, which helps you build and preserve your wealth.
To a certain extent, you have more control over your monthly housing expense.
You can paint your walls any color you desire!

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2. How do I know if I’m ready to purchase my own home?

There are a number of factors that lending institutions look at to decide if you will

qualify for a loan to purchase a home. Keep in mind that these are guidelines and that there are many different programs for different situations. Here are the key factors.

Employment history - Lenders will ask for your history for the past 2 years, as this, together with your monthly income is a good indicator of your ability to pay back the mortgage.
Credit history - Your credit report will be ordered and reviewed to see your past willingness to repay your debts. This report reflects the current status, as well as history, of your use of credit cards, car loans, student loans and mortgages and covers the past seven to ten years. Collections, late payments, judgments and bankruptcy will show on the report, also. They do not automatically disqualify you form obtaining a mortgage. It will depend on when the occurrences took place and whether you have reestablished a good record since then. The information is gathered by and disbursed by the major credit bureaus — Transunion, Equifax and Experian.
Liquid assets - How much money do you have saved for either a down payment or closing costs or both? There are different programs available with different down payment requirements from as little as zero down to as much as 35% down. You can put as much down as you wish and can afford but you may have to show that you have some money left after closing for a cash reserve in case of emergencies. Ask your mortgage consultant what is needed. Reserves can sometimes be counted from various accounts, such as your savings, checking, IRA or profit-sharing accounts, stocks, bonds, mutual funds and cash value in life insurance.

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3. What should I know about my credit? What affects my credit score?

Your credit report is a snapshot at a given point in time of your history and use of credit via loans, charge cards and 30-day accounts, as well as collections and judgments. This history will reflect records dating back 7 to 10 years. Based on this information, you will have a credit score from the 3 major credit bureaus that is used in the processing and approval process. Scores currently range from a low of 350 to a high of 850…the higher the better. These scores are calculated using a formula that identifies certain credit patterns which lenders believe are a strong indicator of risk. Race, color, religion, sex, marital status and age are not used in the scoring process. Here is how your score is weighted and affected by different aspects of your credit:

35% late payments, collections, bankruptcies
30% outstanding debt
15% length of credit history
10% types of credit
10% inquiries (applications for new credit)

A more recent delinquency or collection will have a greater impact on your score than one that is 3 years old. Higher balances and the number of accounts with outstanding balances will also bring down your score. For charge cards, the magic number seems to be 3 different charge cards. Having too many or too few results in a lower score. The type of account also matters, since accounts with finance companies negatively impact your score. This may be an indicator of one’s ability to obtain credit from less expensive sources.

Lastly, here’s some info on inquiries…there are different purposes for inquiries and not all have impact on your score. Those made by an employer, the pre-approved credit offers or those made by oneself direct through a credit bureau have no impact on your score! Whew! Multiple inquiries in a 30 day period for a mortgage or car loan count only as one. Inquiries that are older than 30 days could bring down your score.

The accuracy of your report is important in order to be effective in predicting risk. If you find errors, dispute the errors through the applicable bureaus or ask if the rapid re-check process can be used. For a more in-depth view of what credit scoring is all about, as well as contact information for each of the three credit reporting repositories, just click here.

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4. I filed for bankruptcy a couple years ago. Do I have to wait for 7 years until it drops from my report?

No, you may not have to wait long at all. However, the terms and rate offered to you will be more attractive once you have passed the 2, 3 and 4 year marks since the discharge. In some cases, any sign of a bankruptcy on the report may make certain programs more difficult to get approved for. Don’t be discouraged, though, as there are loans available.

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5. I’ve never applied for credit. Can I get a mortgage?

Yes, there are programs available for you. You my be asked to provide 2 to 3 alternative credit references. A one or two year history with the phone company, cable television company, your car insurance or your landlord can all be used for references when needed.

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6. I just started a new job. How long should I wait before applying?

You may not have to wait at all. If you have been working steadily for the last 2 years in the same line of work, you will be fine. If you are new to your field, there are programs that you may still qualify for, especially if the last 2 years involved education in preparation for your field. If you are self-employed, the guidelines are a little different. Most programs want to see a 2 year history, but this depends on your credit score and your down payment, so ask your Mortgage Consultant if you have any questions.

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7. I don’t have a job right now, but I have substantial savings that will sustain me until I want to join the work fore. Am I out of luck?

No! We have a loan for someone with good credit and no current employment. The rate will be a little higher, but will get you into your next home.

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8. What is an ARM?

The ARM is an adjustable rate mortgage where the rate starts out lower than a 30-year fixed rate loan, but will start adjusting up or down at some future point. These loans may have rates that start adjusting right away or they may be fixed 1 year, 3 years, 5 years 7 years and 10 years. The sooner they adjust, the lower the rate. The rate on these loans adjusts based on a predetermined formula, using a financial index plus a margin, so ask your Mortgage Consultant what that is currently. These loans also have a rate adjustment cap for your protection. An ARM may not fit your plan, but one may work very well, so discuss the pros and cons with your Mortgage Consultant.

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9. What is an interest-only loan and why would I want one?

You are hearing more and more about these types of loans, as more and more lenders offer this in their collections of products. The attraction of this loan is that you can buy much more house. With this type of loan, you pay only the interest on the mortgage for a set period of time, usually 5 to 7 years. You may pay towards the principal at any time, but at the end of that original period, you are required to start paying off the principal in the remaining years left on the loan. This means that your payments will go higher.

You can also choose to payoff the mortgage in a lump sum or refinance the balance. This loan is not for everyone, as there are risks. The higher payments may be a hardship. If your house loses value, you may end up trying to sell a home when the value is less than your loan balance. This loan would be a good fit for you if :

Your income consists of base pay with sporadic commissions or bonuses.
You are working at a job where your income is expected rise consistently in the next few years
You are someone who is disciplined enough to invest the savings in instruments that will make money

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10. When is a good time to refinance my current mortgage?

Refinancing your existing mortgage can help you accomplish a number of things, but saving money is the number one priority for most of us. Deciding to do this should depend on the following factors:

The current interest rate that you are paying
The type of mortgage that you have – 30 yr,, 15 yr,, adjustable rate loan
The amount of equity you have in the home
How long you are planning on keeping the home

Refinancing may make sense for you if:

You are paying a higher rate than what is currently available (I like to see at least 1% difference between what you are paying and what is offered but there are exceptions.)
You have an adjustable rate mortgage and anticipate rates increasing over the next few years
You have most of your wealth tied up in your home and would like to access that wealth to generate cash for any use you may have – remodeling or adding space, consolidating debt, investing in other real estate, paying for college, taking a vacation…you get the idea!
The length of your mortgage is too long or too short for your financial situation

Call me so I can generate some figures for you to review and consider as you make this important decision. In some cases, I may recommend simply taking out a home equity loan or line of credit to help you achieve your goals, rather than refinancing.

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11. What is a 1031 Exchange?

1031 exchanges refer to section 1031 of the federal Internal Revenue Code that permits an investor to defer capital gains when selling a property and reinvesting the proceeds in a new like property. Certain rules MUST be met to allow this:

Both the old property being sold and the new property being purchased must be land, commercial or residential rentals.
A facilitator or accommodator is required to coordinate the closing, as the investor is not allowed to touch the money. You can’t transfer proceeds to escrow until the second property is purchased, nor can you have a friend or broker hold the money for you.
To avoid a taxable gain, all proceeds must be reinvested to purchase a property of greater or equal value.
From the date of closing on the sale of the old property, you have 45 days to identify up to three properties you wish to purchase.
You will have 180 days to close on the properties you have identified.

The title holder for both the old sold property and the new purchased property must be the same until after the exchange is completed.

There are other more advanced exchange techniques you may want to look into, such as:

Reverse exchanges
Construction exchanges
Exceptions to the three-property rule
Primary residence 1031 exchange
Refinancing 1031 property to access tax-deferred cash

Please consult with your real estate and tax professionals before, during and after a 1031 exchange to assure that the proper steps will be utilized to take full advantage of the tax code.

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12. In what states are you licensed to provide mortgage loan services?

We are licensed to process loans in Oregon, Washington, Alaska, California, Colorado, Hawaii, Idaho, Indiana & Montana, with new states being added continuously. Give us a call if you don’t see your state listed here.

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Helping you find your way home.©
Carol Flanagan - Mortgage Consultant
Tonya Hecker - Licensed Assistant