The Truth About “No Closing Costs” Loans

The Truth About “No Closing Costs” Loans

When shopping around for a mortgage, a lender may offer you “no closing costs” on your loan.

The words “no closing costs” sound quite enticing as these costs can range from 2-5% of the loan amount. For a $200,000 loan, that range can be from $4,000 to $10,000 – quite a bit of money!

One thing you need to know about these types of loans, however. There’s no such thing as a free lunch. You’ll either pay for those costs yourself or you’ll pay through a higher interest rate. No bank or lender will pay these fees for you.

What are closing costs?

Closing costs are just as the name implies: the fees you’re charged in connection with obtaining your loan. These fees include:

  • Origination – The fee lenders charge for arranging your loan.
  • Title survey – Background check on the home’s title to ensure it’s free and clear of liens or other issues.
  • Title insurance – Lenders request this insurance to protect themselves and you if it’s discovered later that the title isn’t clean.
  • Attorney’s fees – What the title attorney charges to endorse a clear title and close your loan.
  • Recording fee – What your local town or county charges for recording the new record.
  • Underwriting fee – This fee covers the cost of the underwriter – the company that evaluates your mortgage.

Loan Refis: Closing costs “rolled in”

For people refinancing a loan, closing costs are generally rolled into the new loan. This is because people refinance to take equity out of home to pay down credit card debt, fund a college tuition, or make home improvements.

Or, you may be underwater and are refinancing to take advantage of a lower interest rate. In this case, you aren’t taking cash out but your closing costs are still rolled into the new loan.

Home Purchases: Where closing costs come into play

In order to entice you into doing a loan application for a home purchase, a bank or lender may advertise “no closing cost” loans. This type of advertising is patently false as you will have to pay closing costs – even if the lender “waives” them.

What does this mean?

First, you will need to pay the local recording fees, escrow and insurance pre-payments. No bank will pay these fees for you as they’re non-negotiable – everyone has to pay them. (Even I had to pay them when I purchased my new home.)

Second, in order to offset the cost of the other fees, such as the appraisal fee or attorney’s fee, the lender will increase the interest rate. So you end up paying much more on the back-end.

Picture a scale – perfectly balanced. You have the loan’s interest rate on one side and your fees on the other. To keep the scale balanced, a lender offering to “waive” your fees will need to increase the interest rate in order to keep the scale balanced.

Tip: Look for the lowest combination of rate + fees

Generally speaking, banks charge lower fees and higher interest rates. Mortgage brokers have higher costs and lower rates. Every lender has their own scale – which is why it pays to compare apples-to-apples using your Good Faith Estimate.

One other word of advice: Be extremely wary of paying an up-front application fee or “deposit.” Some lenders will charge you $500 to $700 deposit to begin your loan application process. Don’t fall for it.

Once you change your mind and decide to go with another lender, you lose this deposit. (See my post, “Good Faith Deposit and Other Upfront Fees” for additional details.)

As always, what’s most important, when shopping for a mortgage, is choosing the right company that will deliver.

Here at Meridian Home Mortgage, we work with you every step of the way – from delivering pre-filled out forms to coming to your home for a closing. See our Customer Review page for the unvarnished truth (we let our customers do the talking and don’t change a thing they say).

And, if you’re ready to begin home shopping – give us a call or apply online.

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FICO Changes = Higher Credit Scores for Consumers

FICO Changes = Higher Credit Scores for Consumers

Fair Isaac Corp. will soon change their FICO scoring algorithm used in determining a person’s credit scores. It should result in higher credit scores for many consumers. FICO calls their new scoring method FICO Score 9. This method will no longer grade medical collections as harshly and it will not factor in any paid or settled consumer collection accounts in credit scores at all.

What is FICO?

FICO is the credit scoring algorithm created by Fair Issac Corp. It only uses information reported to the three major credit bureaus to grade a consumers credit worthiness. According to myfico.com, a FICO Score estimates the “level of future credit risk” of a consumer.

Consumers have three FICO Credit Scores – one for each of the three main credit bureaus (Equifax, Experian, and TransUnion). Each bureau uses the information reported to them when determining their FICO score. So while each bureau uses the same FICO scoring algorithm, the scores can differ because not every creditor or lender reports to all three bureaus.

FICO Score 9, once released, should result in higher scores for many consumers thanks to two major changes in how they will grade collection accounts.

Medical Collections

Open medical collections will no longer negatively affect your credit score as much as they do now. They will no longer be counted the same as other open consumer collection accounts.

Most major lenders have long overlooked medical collections, knowing that they do not give a true indication of a consumer’s ability to re-pay debt. An applicant who is ill-prepared to pay for a sudden major medical debt, for example, should not be graded as harshly as one that walked away from consumer debt that they had promised to pay.

Still, these collections can have a major negative impact on credit scores. And lenders are still very credit score driven. Lower scores due to medical collections can lead to higher rates, higher fees, and even loan denials.

The upcoming changes in FICO scoring will finally acknowledge what lenders have known for years; that medical collections do not represent a borrowers true ability to re-pay debt. Thankfully, credit scores will no longer suffer once these changes take effect. In fact, FICO claims that consumers can see as much as a 25 point increase in their score!

Paid/Settled Consumer Collections

As of right now, if you have older collection accounts that have been paid in full or satisfied, they can still negatively affect your credit scores for years, even though they report as being satisfied or paid.

But after FICO Score 9 takes effect, these paid/satisfied collection accounts will be dropped from your credit report altogether. They will no longer have a negative impact on your FICO scores. In other words, the new FICO scoring method will continue to count open or unpaid collections against a consumer’s score, but it will reward them by removing the collection account once it is paid or settled.

Who Benefits?

These two major changes in the FICO scoring method should open doors for a lot of consumers who will realize higher credit scores as a result. It can equate to lower rates, lower fees, and even loan approvals instead of denials. It also benefits lenders by providing a more accurate assessment of a consumer’s ability to re-pay debt.

There is no exact date for the FICO 9 Score release, but rumor has it that it will happen sometime in the Fall, 2014.

Please do not hesitate to call one of our Personal Advisers for more information. We look forward to hearing from you soon.

Veterans – Get 100% of the Cash Out of Your Home

Veterans – Get 100% of the Cash Out of Your Home

The U.S. Department of Veterans Affairs now offers a 100% Cash-Out Refinance Loan to eligible veterans. If you’re a veteran, or a surviving spouse, you now have a wonderful opportunity to use up to 100% of your home’s equity for paying off debt, paying college tuition, or just about any other purpose.

The reason lenders are willing to lend on these higher equity cash out loans is because the loans are backed by the VA.

How the 100% cash out program works

The 100% VA Cash-Out Refinance Program requires that you have sufficient income and that the loan is for a home that you’re occupying. In addition, you need the following:

Credit score of 620 or above –The VA has always allowed 100% financing with lower scores. But just about every lender capped themselves at 90 to 95% for cash VA loans with higher credit scores of 640+.

But recently, due to major changes in the industry, lenders have loosened their guidelines on VA loans. We can now lend to 100% on a VA cash out loans with a minimum credit score of 620 – which makes the Cash-Out Refinance program a truly amazing opportunity.

If you have a score lower than 620, we can still work with you. Meridian offers lower percentage (i.e. 80%) VA cash out options. Please inquire!

Certificate of Eligibility(COE) – To begin the process, you must first complete the COE (VA Form 26-1880) as well as provide evidence that you meet the eligibility guidelines spelled out below. The COE verifies to lenders that you’re eligible for a VA-backed loan.

We can help you with this form – just call us. We do ask for a copy of your DD214 (and sometimes we don’t even need that), then we pull your COE and determine eligibility.

How eligibility is determined

The VA determines eligibility using a number of factors, but in general, you’re eligible for the VA Cash-Out Refinance Program if you fall under one of the following requirements:

  • You were an active-duty veteran who served a minimum of 90 consecutive days in wartime
  • You were an active-duty veteran discharged during or after WWII without a “dishonorable” status
  • You were a peacetime veteran who served 181 consecutive days
  • You served for two years, either as an enlisted veteran with service dates after 1980, or an officer with service dates after 1981
  • You served 6 years in the Selected Reserves or National Guard
  • You’re the spouse of a deceased veteran with a service-related death and you have not re-married, or you’re a spouse of service person missing in action or a prisoner of war.

Eligibility may also be established for U.S. citizens who:

  • Served in the armed forces of a government allied with the U.S. in WWII
  • Served as a member in certain organizations, such as officers in Public Health Service, cadets in U.S. military, Air Force, or Coast Guard, midshipmen at the U.S. Naval Academy, officers in the National Oceanic and Atmospheric Administration, and merchant seamen in WW II service.

We’ll pay your appraisal fee

If you’d like help with obtaining a VA Cash-Out loan – or with determining your eligibility – please call us at 877-878-0100 or complete our contact form. We can help you complete the COE or answer any questions you have.

In addition, if you close your VA loan with Meridian, we’ll pay your home appraisal fee up front. It’s our way of thanking you for your service to our country.

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Help Your Loan Get Approved Faster

Help Your Loan Get Approved Faster

For the past twenty years, three standard mortgage practices have occurred behind the scenes during the mortgage process:

  • Verification of Employment (VOE)
  • Changing of the “mortgage clause” on your homeowner’s insurance (HOI) declaration page
  • Credit supplements, such as a Verification of Mortgage (VOM) or supplements to verify credit card or student loan monthly payments

In the past these three procedures have usually occurred without the applicant’s knowledge. The lender was just required to send in a copy of the applicant’s signed Borrower’s Authorization that gave written permission to release information. But privacy policies have tightened on the employer, HOI, and consumer-credit levels, and these standard practices now need the mortgage applicant’s verbal approval before they are completed.

If you are alerted by your Human Resources or Payroll Department that Meridian Home Mortgage is requesting a Verification of Employment, please give them permission to provide this information.

Likewise, if your HOI company lets you know they have received a request from Meridian Home Mortgage to change the mortgagee clause (basically just changing the lender name) on your insurance declaration page, please give your permission to make the change.

You may also receive a phone call from our credit vendor, CBC Innovis. This is the credit agency that Meridian uses to pull your initial credit report. Please work with CBC Innovis as quickly as you can to provide any needed information or perform any requested conference calls with your current creditors. This will help to expedite the underwriting process. If you ever feel uncomfortable returning a call to CBC Innovis or providing them with any requested information, please feel free to call your Meridian Home Mortgage contact first to verify their authenticity.

Following these three basic suggestions will help your team at Meridian prepare your loan file for underwriting in a timely manner. Please be sure to call at anytime to discuss further. We look forward to speaking with you soon.

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Your Loan is Reviewed by an Underwriter

Your Loan is Reviewed by an Underwriter

The most important step in the loan application process, after your home value is determined, is the loan review by a Conventional, FHA or VA underwriter.

It is important to know that before we submit your loan to an underwriter we do everything within our professional power, through diligent pre-processing, to make sure the underwriter has the ability to issue a Conditional Approval on every file. There are several things that you can do to help us move your loan to underwriting as quickly as possible.

Underwriting

The underwriter acts as a “gate keeper”, protecting the interest of the lender and safeguarding the limited funds they have to lend. Underwriters follow strict black-and-white guidelines established by industry investors. These guidelines are harsher than they were during the mortgage lending boom of 2002 – 2008. The days of what many industry professionals describe as “common sense underwriting” are long gone.

Once an underwriter reviews your refinance application they will issue one of three determinations: a Conditional Approval, a Suspension, or a Denial.

When a Conditional Approval is issued, a member of our Pipeline Team will call you immediately to review the approval and discuss any conditions needed before we can schedule your loan to close.

Rest assured that an underwriter issuing a Suspension or Denial on your loan does not end your relationship with Meridian Home Mortgage. This is where Meridian Home Mortgage steps in to defend you, as your advocate. We have an entire team at Meridian dedicated to overcoming underwriting objections, re-working your application, and unearthing underwriting errors.

Still, we will be candid with you at anytime during the process if we do not believe your application has an opportunity to close. Just know that we are devoted to exhausting every last ounce of effort to match your family’s financial situation to a qualified loan program.

While Meridian will be shouldering most of the work, we have come up with a small list of things that you can do to help ensure that your loan closes as quickly as possible. Please do your best to adhere to Meridian’s list of Do’s and Don’ts while your loan is being underwritten.

Here are a couple of other important things to know:

  • Turn-times vary
    Depending on the type of loan for which you are applying and the saturation of the current market, the underwriting process for your application may take up to 5-14 days. A large portion of Meridian’s service to you is to gently, but proactively, nudge the underwriter to review your file as quickly as possible.
  • Disclosure Mailings:
    You will most likely continue to receive loan disclosures throughout the process, either electronically or through the mail from your designated lender. Although there may be cover letters with these lender disclosures that state you need to sign and return them, there is no need for you to take any action. They are simply being sent to you by the lender so that they remain in compliance with State and Federal disclosure laws. Feel free to discard these documents.

We appreciate your cooperation and patience while your loan is being underwritten. Please do not hesitate to call with any questions or concerns that you might have. We look forward discussing your upcoming Conditional Approval with you very soon.

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Do’s and Don’ts While Your Loan is Being Underwritten

Do’s and Don’ts While Your Loan is Being Underwritten

Any change in your employment, income, or credit profile, no matter how small or seemingly insignificant, can adversely affect your loan approval. It is critical that you follow this list of Do’s and Don’ts while your loan is being reviewed by an underwriter:

  • Do make the minimum monthly payments on your consumer debt until your new loan closes and funds. Any deviation from this may negatively affect your mortgage application.
  • Do make sure that your mortgage payments are no more than 15-days late until your new loan closes and funds. As your application gets closer to settlement, please inform your Meridian Home Mortgage contact if you are at risk of paying your mortgage payment more than 15 days late.
    **Never pay your mortgage payment 30 or more days beyond the initial due date**
  • Do answer or return calls from the Title Company working on your application. On occasion there are outdated or unreleased liens which can cloud the ownership of your property, or similar situations which require the Title Company to contact you and request information to clear your title in preparation of your potential closing.
  • Do fax or email us any items that we request from you immediately. These items are required by the underwriter. All of the documents in your file have an expiration date. Every day that passes between the underwriter’s request and the time you provide them means additional items have the potential to expire. We will always be battling the underwriter to crunch time frames on your behalf and to immediately establish the first available closing date.
  • Do hold onto all of the pay stubs, bank statements, retirement account statements, pension statements and social security statements that you receive electronically and through the mail until your new loan closes and funds. You may be required to provide them.
  • Do not resign from your current job or retire during the loan process. If you have an opportunity to leave your current job for a better opportunity please reach-out to us prior to making a decision to determine how it might affect your loan.
  • Do not open any new credit accounts or apply for new credit accounts prior to your new mortgage loan closing. Any new account or credit inquiry can easily be identified by the underwriter and may put your application at risk. We understand there are life situations that arise, such as the need to apply for student loans to finance a child’s upcoming college semester. We ask that you discuss these types of scenarios with us prior to taking action.
  • Do not make any balance transfers on your existing credit card balances. Any new account or balance transfer may slow your mortgage application process.
  • Do not pay off any existing consumer credit accounts in full (e.g. credit cards, auto loans, etc.) unless it is through the natural progression of making your minimum monthly payment.

Following these instructions will help to prevent any delays in your loan closing. Please call us at anytime if you have any questions or if you would like to discuss any specific scenario.

Home Equity Line of Credit (HELOC) – The Credit Card Mortgage

Home Equity Line of Credit (HELOC) – The Credit Card Mortgage

On the surface, HELOCs look like a great product for people. They have low rates. The interest is tax deductible if funds are used for home improvements. You can access a lot of money and enjoy low monthly payments because of the interest-only feature.

And, there’s certainly a lot of “access” when you consider the higher credit limits allowed on HELOCs than what comes with the more common bank product – the credit card.

Based on your home’s equity level, the bank gives you a line of credit, which you draw from using a checkbook. These are usually set up as 20-year loans with interest-only payments for the first 10 years (the draw period) then principle and interest payments the remaining 10 years (the repayment period – no more draws).

HELOCs are so much fun

You can use a HELOC to pay for anything! Pay off credit cards, do some home improvements, buy a car, pay for college . . . sometimes people are even tempted to pay off their mortgage with them!

You know something else? With a credit card, you know you’re using money you don’t have. With a HELOC, there’s this feeling you’re borrowing from yourself somehow.

What’s not to love, right?

Here’s the real truth: HELOCs function in much the same way as credit cards but can do considerably more damage. Here’s how:

1. You have access to BIG money

Because there’s no collateral for them, credit cards generally have $10,000 to $15,000 limits (a little more if you have excellent credit). HELOCs, on the other hand, can go up to $100,000 or more. The problem? Just like credit cards, the more you owe on a HELOC, the more trouble you’re in.

2. The interest is calculated just like a credit card

Here’s what people often don’t understand: the interest is compounded. This means interest is charged on top of interest.

Compound interest is very different from simple interest. With a conventional mortgage, you’re charged simple interest, meaning you’re charged interest only on the amount borrowed. Using what’s called amortization, the loan is structured so that in the beginning a greater percentage of your monthly payment goes toward interest and over time more and more of your payment is applied toward principle. The longer you hold the loan the less interest you actually pay.

With compound interest time is never on your side, if anything it’s working against you. Compound interest works wonders when you’re saving money but it works against you big time when you’re borrowing money. This is why it’s so hard to pay down credit card debt.

3. HELOCs are hard to PAY OFF

If you thought paying off a bunch of credit cards was tough, try paying off a big ‘ol HELOC. Refinancing doesn’t always solve the problem either. The reason is the artificially low “interest only” payment on the home equity line.

Let’s say you want to refinance. Your mortgage is $1500 and your HELOC is $200 per month. That’s $1700. If you refinance them together, your new payment will probably be higher – because a mortgage payment is principle and interest. You can’t pay just the interest forever.

No other type of loan (auto, mortgage, installment loan, etc.) has an “interest-only” payment structure – only credit cards and HELOCs.

4. Consumer protections don’t apply to HELOCs

In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act. It’s a consumer protection law that requires credit card companies to state how long it will take you to pay off your credit card balance if you make only minimum payments. This law also forced credit card companies to increase the minimum payment amount to prevent consumers from languishing in debt forever.

These protections do not apply to HELOCs.

And, while the new bank-policing Consumer Financial Protection Bureau (CFPB) has outlawed interest-only mortgages because they’re so troublesome to consumers, their restrictions don’t apply to HELOCs.

5. The party ends eventually — HELOCs have a maturity date

At some point, you’re going to have to pay the piper. HELOCs have a 10-year maturity date. If increases in the prime rate don’t get you first, your maturity date will.

Once your HELOC matures, the draw period of the loan expires and the entire balance at that point converts to a 10-year installment loan at prevailing home equity loan rates – which are higher than first mortgage rates. At this point, you can kiss that low interest-only payment goodbye.

So let’s call HELOCs what they are. They’re not “smart money.” They’re not “borrowing from yourself.” And they’re definitely not “low payment forever.”

They’re credit card mortgages.

If you need help getting out from under a nasty HELOC, give us a call. One of our Loan Officers can answer any questions you have and help determine if a refi is right for you.