Interim or pre-paid interest
I have had a couple of inquiries recently about mortgage interest lately so I thought I would post a few bits of information about how interest is accrued on a mortgage. Interest is paid in arrears. Your monthly mortgage payment is always applied to accrued interest first, assuming your payments are up to date. In other words, your April mortgage payment will pay for March's accrued interest. Simple enough, right?
It is customary that a borrower pays for interim interest at closing. This means that if you closed on your new home loan on April 15th, there are 15 days remaining in April. Rather than make your first payment due on May 1st so you can pay that remaining 15 days interest, the lender will require you pay that interest up front at closing. This will make your first payment due on June 1st. The June 1st payment will pay for May's interest.
This works the same if you close on any other day of the month (generally - I will explain further in the next paragraph). If you close on the 28th of May, you pay the remaining days worth of interest at closing and your first payment will be due on July 1st. The July 1st payment will pay for June's interest. With me so far? I hope so.
There is a couple of exceptions to this rule.....
First exception: If you close between the 1st and the 7th of the month, sometimes the lender will give you a credit for those days and require your 1st payment on the 1st of the following month. Example - If you close on April 3rd, the lender may give you 3 days worth of interest as a credit on your closing statement and then charge you 30 days interest on May 1st. This isn't always the case but it happens. More often that not, you will have the option to structure your loan this way or pay the remaining 27-28 days worth of interest in April at closing and have your first payment due on June 1st.
Second exception: Sometimes the lender will take the remaining days worth of interest and combine it with the payment that is due the month after next. Example - If you close on April 15th, there are 15 days left in the month. Rather than collect the interest for the remaining 15 days at closing, the lender will combine those 15 days worth of interest with the next months interest and collect it all with your first payment. If you close on April 15th, your June 1st payment will pay for May's interest AND the remaining days worth of interest in April. This means that your first payment will be higher than the 2nd and consecutive payments.
I hope this sheds a bit of light on interim interest (sometimes called pre-paid interest) and the way interest is paid on your home loan.
Posted by Jason Lash at 9:25 AM
Junk Fees - Part 2
I addressed the topic of junk fees on a previous post but feel the need to follow up with this question..."When is a "junk fee" NOT a "junk fee"? There seems to be a misconception about junk fees that is running rampant right now. Not every fee from the lender or broker is a "junk fee". A broker fee is not a junk fee. When a broker fee is combined with a processing fee and an administrative fee, then it is a junk fee. The practice of nickel and diming people is considered collecting junk fees. A lender's underwriting fee is NOT a junk fee as long as it is within reason. Anyone who tells you that a reasonable underwriting fee is $100 should not be giving mortgage advice.
In 10 years of being in this business, I have never seen a $100 underwriting fee. On a conventional loan, a reasonable lender underwriting fee will equal about $500 give or take a few dollars. On a non-conforming loan, a reasonable underwriting fee is about $675. Some lenders call this fee an administration fee. It is all the same to me. Some people may not like what I am saying but think of it this way. A qualified underwriter is highly skilled, certified, and in some cases, licensed. The lender needs to pay this person a salary for their services. The underwriting fee helps cover the cost of operating an underwriting dept. Technology, paper, ink, fax lines, phone lines, electricity, etc. are all costs associated with loaning money to people. This is aside from the lender legal fees for frivolous law suits, document drafting, and compliance issues. All this cost is accrued prior to the loan being issued.
Some lenders out there may dance around this subject and offer lower costs that this. Believe me, they are getting their money one way or another. A higher rate is probably the result of lower fees. A prepayment penalty may also be in effect. I am not saying there is not an exception to the rule but it is unlikely. I am not out to defend lenders or other brokers but there has to be a line drawn where one needs to stop being petty. There are real world costs associated with running a business and those costs must be paid. Profit comes later and is a welcome by product of good service.
My mission is to hinder the incompetence of other mortgage professionals by educating and empowering the borrower. The hard part is trying to relay what is realistic and reasonable when it comes to the expectations of the borrower. A real estate broker can charge 7% or more of the sales price for their service. Mortgage professionals make the transaction possible by providing financing to the buyer. Believe it or not, there is a lot of work involved in providing this service. Expect an underwriting fee. The rest is just junk.
Posted by Jason Lash at 8:30 PM
Getting strict on bad credit
Well, the honeymoon is over. More and more lenders are tightening up the requirements for bad credit mortgages. For a while there, the minimum credit score for 100% financing on a single family residence was 580. I've got some bad news. The majority of lenders that specialized in that loan product have increased the minimum credit score to 600. Now there are a few stragglers left but they most certainly have increased their rates through the roof on these loans. Credit scores aren't the only requirement for these loans though. Most of these lenders requirement that a borrower have at least 3 major tradelines open and in good standing for at least 12 months. Translation - 3 credit lines/loans with no late payments for last 12 months. Again, there are exceptions but you pay for the exception.
I guess the question everyone is asking is "Why the change?" It has to do with the number of foreclosures and defaults from these borrowers, plain and simple. There is certainly a higher risk offering these types of loans and lenders are finding out how hard it is to sell a home on today's market. The loss from these lenders is increasing and it doesn't look good for future borrowers.
What can be done about this change? Well, there needs to be a change in strategy. It is possible to raise a person's credit score 30-40 points in a relatively short amount of time. Follow these simple steps: Obtain a copy of your credit report from all 3 bureaus. This is your template to work with. If there are errors on any of them, dispute them with ALL 3 bureaus. Bring past due accounts current. Keep proof of this and submit it to the credit bureaus if need be. Pay your balances down to under 25% of the available credit limit. If you have 3 tradelines, don't open new accounts. Don't open new accounts. Don't open new accounts (is there an echo in here?). Don't close ANY open accounts. Pay them off but don't close them. Don't apply for several different types of accounts at once; meaning don't apply for an auto loan, credit card and bank loan all within a 30 day period. It doesn't look good. If you must apply for credit and shop around for the better deals, limit your inquiries to a 14 day window of time. Don't apply anymore after the 14 day window. Make sure the credit inquiries are for the same purpose. Lastly, try to avoid "Financial Companies" when obtaining credit. In other words, avoid the high interest personal and auto loan lenders.
By taking these simple steps, you will be on your way to a better credit score and more appealing loan terms.
Posted by Jason Lash at 9:28 AM
