There’s much confusion these days about how often or when you should allow your credit to be pulled. Here’s a little background info on when it’s ok to say yes….
The fact of the matter is that today when you are investigating home financing, the big question on everyone’s lips is, “What’s your credit score?” Many people are clueless as to what their credit score is. Pricing and product availability are hugely driven by credit scores in the mortgage industry. The difference between a 620 credit score and a 720 score means a world of difference to your wallet. However, when it comes to lending money for a home loan, there is a point when a lender must make a credit inquiry.
What is a credit inquiry? It’s when a lender or another entity you are asking to extend you credit requests a tri-merge credit reporting agency to assess and report your credit scores. At the back of the report, there is a list of what organizations you have given permission (or not) to pull your credit recently. And, too many credit inquiries can affect your credit score negatively. However, not all inquiries will do so, just ones that are a result of you applying for new credit. For example, if you apply for a mortgage, car loan or credit card, these are the types of inquiries, when you agree to them, which can affect your FICO credit score. The term FICO stands for Fair Isaac & Co. Credit, the entity that developed this scoring method for determining if you’ll actually repay your debt. However, some inquiries don’t affect your FICO credit score, like a future employer doing a background check on your credit.
So, if you want to apply for a mortgage, and compare different lenders, are you asking for trouble by allowing every Tom, Dick and Harry to pull your credit (or Tammy, Diane and Helen for that matter)? Well, yes and no. It depends. The scoring engine will typically ignore all mortgage or auto inquiries made in the 30 days prior to your most recent scoring. So, you need to make a decision within 30 days if you plan to do major rate shopping. And if the scoring engine finds mortgage or auto inquiries older than 30 days, it groups those inquiries into a typical shopping period as well. So, yes you can shop, just do so wisely.
I advise you to let one lender pull your credit; they can tell you what your score is, and then you can inform other lenders what your score is for the purpose of comparing loans. You can also ask what your debt to income ratio is. With that information, a lender should be able to give you a Good Faith Estimate and Truth in Lending that’s pretty spot on. If they say they can’t do so without pulling a credit report, then move on. A lender should be able to give you an estimate if you know the answers to the right questions. And since it’s an estimate, if you give the wrong information, be aware that all bets are off. As long as you are aware that what you are quoted is based on the information you’ve given(as yet unverified), the lender should be able to give you information that allows you to choose them from other considerations. When you’ve made the final choice, the lender will then have to pull your credit to move forward if they have not done so already.
So, be a smart shopper. But don’t be careless with your information. It could hurt you if you don’t share it wisely.
Showing posts with label Truth and Lending. Show all posts
Showing posts with label Truth and Lending. Show all posts
Tuesday, May 20, 2008
Thursday, February 14, 2008
Telling the Truth about Mortgage Lending
How can you really figure out what exactly your paying in finance charges if you keep that mortgage for 30 years? What's another tool to use in comparing mortgages? Check out your Truth in Lending document.......
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.
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.
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