Forum Replies Created
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Gustan
AdministratorAugust 8, 2024 at 6:52 pm in reply to: What FICO Model do Lenders Look at For FHA LoansYes, there are different FICO models, and lenders may use specific models for each type of loan. Here are the FICO models used by lenders for FHA loans:
FICO Models and FHA Loans
Models Used by Lenders:
Different lenders use different versions of the FICO score, depending on what type of credit product they offer. For mortgage loans, including FHA loans, lenders often use FICO models tailored to their needs in mortgage lending.
Model for FHA Loans:
These are some of the most commonly used FICO score models for FHA loans:
- FICO Score 2 (Experian/Fair Isaac Risk Model Version 2).
- FICO Score 4 (TransUnion FICO Risk Score 04).
- FICO Score 5 (Equifax Beacon 5.0).
These models belong to an earlier generation of FICO scores, but they continue to be widely used in the mortgage industry because they have proven effective at predicting mortgage risk.
FHA and FICO Scores
Requirements:
Minimum FICO Score: To qualify for a down payment as low as 3.5%, you’ll typically need a minimum credit score 580 with the Federal Housing Administration. However, if your score is between 500-579, expect lenders to ask for at least ten percent down because finding one willing to work with such low scores can be challenging.
Credit History: Beyond looking at your credit ratings from one bureau alone, like Experian’s or Equifax’s version of “FICO.” These government-backed mortgages also evaluate borrowers’ overall financial past, including payment histories and debt-to-income ratios, which measure how much money people owe against their gross income levels.
Derogatory Credit Tradelines:
Any derogatory marks found, such as late payments over thirty days old but less than ninety days overdue, among others, make sense as to why many applicants might feel overwhelmed when trying to apply on their own without professional help!
Most Accurate Model:
Fico 8: This is the most widely used version across different types of credit products, such as credit cards and auto loans. It’s generally seen as highly accurate for assessing general creditworthiness.
FICO 9: Released to account for certain changes in consumer behavior; includes factors like rental payment history. While increasingly adopted, it has yet to become standard in mortgage lending.
FICO 10 / FICO 10 T: These newer versions look at trended data over time to give a more holistic view of consumer behavior. However, mortgage lenders have yet to widely embrace these models.
Choosing the Right Model
For FHA loans and other types of mortgages, lenders primarily use these FICO models:
- FICO Score 2 (Experian).
- FICO Score 4 (TransUnion).
- FICO Score 5 (Equifax)
Although FICO 8 and FICO 9 are commonly used in other areas of credit applications, such as personal loans or student debt refinancing offers from SoFi, banks still prefer these older methods since they have longer track records of predicting risk for home lending.
FHA Loans: Lenders typically use FICO Score 2, FICO Score 4, and FICO Score 5.
Most Accurate Model: For general use cases where people apply for various forms of credit facilities like car financing or opening new bank accounts with overdrafts, etc., then both FICO eight & nine provide reliable assessments of an individual’s ability to repay borrowings promptly. It also shows instances where rent payments weren’t met but became current over time again. If someone needs them more specialized towards mortgage terms alone, relying on older ones(Mostly HECM) should suffice, too. Given their wide universal adoption rate, even though some might argue otherwise due to lack of widespread awareness hereof nationally, this notion outweighs this notion because historically, it has worked well enough before till now, so why change a good thing?
Credit Score Requirements: FHA requires a minimum score of 580 for a 3.5% down payment, but borrowers with lower scores may still qualify with a larger down payment.
Knowing which FICO model is used can help applicants prepare to apply for a mortgage and work on their credit accordingly.
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“Real Estate Owned” (REO) is used in mortgage lending. It refers to a property owned by a lender, usually a bank, after an unsuccessful sale at a foreclosure auction. Here’s what it means:
What does REO mean?
Definition:
Real Estate Owned (REO): Properties that have reverted to the lender after an unsuccessful foreclosure auction
How does a property become an REO?
Default: The property owner fails to make required mortgage payments and goes into default.
Foreclosure: The lender starts legal proceedings to recover the amount owed on the loan.
Auction: The property is sold at auction; if no acceptable bids are made, ownership reverts to the bank.
REO status: Property becomes part of the bank’s REO inventory
Characteristics of REO properties
Lender-owned: A bank or other financial institution owns the property.
Condition: REOs can be in various states of disrepair; they often are sold “as is,” with no repairs or improvements made by the bank.
Clear title: Lien and tax problems should be cleared up by the lender, which then makes sure that when it sells, the title will be free and clear of such issues
Discounted prices: Banks want to recoup as much money as possible from their bad loans so that they will price these homes below market value.
The REO process
Acquisition: The bank takes possession of the property after the failed auction.
Assessment: The bank has someone determine the market value and needed repairs for every home in its portfolio.
Maintenance/repair: Basic maintenance is done when necessary to preserve the value of houses still being marketed. More extensive repairs are performed only if cost-effective, given current market conditions. Otherwise, those units may sit vacant until selling proves profitable years later. It depends upon the area specifics involved here, whether urban, suburban, rural locations, etcetera…
The marketing time frame varies widely but typically ranges between three months to two years…
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Gustan
AdministratorAugust 8, 2024 at 5:26 am in reply to: You May Think You Want a Doberman PincherGreat story, Peter. Love it. It is flashback for me. Every puppy goes through the stages of puppyhood. I told you that I got my German Shepherd, Chase, when he was eight months old. Chase must not have been socialized because he did not know to enter doors, go down and up the stairs, no name, did not know what toys and bones were, and never had human food before. At first I thought he was retarded. The breeder was asking $2,500 for his pups and why was Chase $800 dollars? I got myself a retarded dog. GREAT. He was scared of little toy poodles, peed like a girl, but he did know destruction. He took one shoe, sandals, flip flops, boots of a matching pair. He then took a brand new prescription glasses I just paid for $1,000 and chewed them. He kept of finding these knick knacks from years or even decades ago totally out of the blue. I think it is about one year before he started to normalize and mature. I heard German Shepherds and Doberman Pinschers are very intelligent and very easy to train. It took me no more than 15 minutes to train Chase how to sit and 15 minutes to train Chase how to stay. I did not train him down or heel because when am I going to have him down. Sit is just fine and stay. However, these dogs do not need formal training because they pick up on everything their owners do and say. Chase knows how to communicate with me and control me. However, he was extremely stubborn and he was and is NOT a retarded dog. Quite the opposite. Very important to spend lots of time together with the dog and communicate with them. Thank you for sharing your story. Please post pictures and video clips. Love to see him in action. Enjoy the seven months with your Doberman troublemaker. He is only a pup once. As he gets older, he will mature and you are going to miss his silliness. Great that sleeps because that is the time they grow and mature.
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In the mortgage lending industry, “LOX” means “Letter of Explanation.” A Letter of Explanation is a document that explains or gives more details about certain aspects of an applicant’s financial history or application, which may need further clarification. Here is a closer look at what LOX involves:
Purpose of a Letter of Explanation (LOX)
Clarification: It clarifies any discrepancies or strange items in the borrower’s financial papers, credit report, or other parts of their loan request.
Additional Information: It offers information not provided in the standard documents submitted during the mortgage application process.
Reassurance: It assures lenders that borrowers can still repay loans despite problems or anomalies encountered.
Common Reasons for Requesting a LOX
Credit Inquiries: To explain recent credit inquiries and whether they led to new credit accounts.
Employment Gaps: To clarify periods when one was unemployed or changed jobs frequently.
Large Deposits: To reveal the origins behind large sums deposited into bank accounts.
Derogatory Credit: To give reasons for late payments, collections, bankruptcies, etc., that appear on one’s credit report.
Address Discrepancies: To clarify why addresses on different documents do not match.
Income Variations: To explain significant income changes within short time frames.
Structure and Content of a LOX
Introduction: Begin with a brief statement introducing yourself and indicating why you are writing this letter
Explanation: Clearly state what issue(s) you want to address and tell your story as truthfully as possible without leaving out any important detail(s), though keeping it concise enough not to bore reader(s).
Supporting Evidence: Attach copies of relevant documents, such as pay stubs, W-2s, etc., that support whatever claims/assertions are made therein, including dates when such things happened if known.
Reassurance: Reiterate your commitment to completing the necessary paperwork while assuring them that you can meet payments due under the agreement terms between the parties involved.
Contact Information: Provide current phone number(s) where they can reach you if need be; also include an email address(es) for easier communication should such an issue arise later on during the processing stage or even after closing the deal since sometimes things might not work out exactly as planned initially.
Example of a LOX
Subject: Employment Gap Explanation Letter
[Date]
[Borrower’s Name]
[Address]
[City, State, ZIP Code]
[Loan Officer’s Name]
[Mortgage Company]
[Address]
[City, State, ZIP Code]
Dear [Loan Officer’s Name],
I am writing to explain the gap in my employment history from [start date] to [end date]. During this period, I was not employed because [provide a reason, e.g., I was caring for a family member, pursuing further education, etc.].
I have since returned to the workforce and have been employed at [current employer] since [start date]. Attached are copies of my recent pay stubs and an employment verification letter from my current employer to substantiate my current employment status.
Please let me know if you need any further information or documentation. I appreciate your understanding and consideration of this explanation.
Thank you for your assistance.
Sincerely,
[Your Name]
[Your Contact Information]
Importance of a LOX
Loan Approval: It can be critical in the approval process by helping underwriters make favorable decisions.
Transparency: It shows that borrowers are open with their lenders about everything necessary during the application stages. Make the letter of explanation easy for them to work together towards achieving common goals. A simple LOX makes mortgage loans approved faster than usual based on merits only without considering other factors, which may delay such undertakings unnecessarily or cause them to fail altogether due to a lack of trustworthiness among the parties concerned.
Trust Building: Establishes trust between borrowers and lenders as each party strives hard to show good faith throughout the transaction until the final payment, ensuring that all involved parties benefit from such an arrangement. A well-crafted LOX can address the lender’s concerns effectively, facilitating a smoother loan approval process.
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Great question, Tina. The APR stands for Annual Percentage Rate. It is the yearly cost of borrowing money and is broader in scope than the regular interest rate. Allow me to explain.
Regular Interest Rate vs. APR:
Regular Interest Rate: This is the basic rate charged on the principal of a loan.
APR: This includes not only the interest rate but also other costs associated with a loan, such as broker fees, discount points, and some closing costs.
Calculation of APR:
Though it can be quite complicated to calculate exactly, here’s a simplified formula:
APR = ((Fees + Interest) / Principal) / n) × 365 × 100
Whereby:
Fees = All fees charged on this loan
Interest = Total interest paid over the life of the loan
Principal = Amount borrowed
n = Number of days in term of loan
APR Formula for Mortgages:
Mortgage loans are more complex because they have longer terms (often 30 years) and include additional costs. The formula usually requires software or financial calculators to handle such calculations accurately.
Case Scenarios:
Let’s do an example:
Scenario: You’re taking out a one-year $10,000 loan with a 10% interest rate and a $300 origination fee.
Step 1: Calculate total interest
- Interest = $10,000 × 10% = $1,000
Step 2: Add fees to interest
- Total cost = $1,000 + $300 = $1,300
Step 3: Divide by principal
- $1,300 / $10,000 ≈0.13
Step 4: Convert to percentage
- 0.13 ×100 ≈13%
So, in this scenario, the annual percentage rate is approximately thirteen percent (higher than ten percent, which was just an interest rate due to the extra fee).
In the case of a mortgage or any other complicated loan, you will need to know things like loan terms, payment schedules, and various fees to calculate this. Therefore, such calculations are usually performed using professional financial software.
Tina, this is a great question. Would you like another example, or do you want to talk about some specific kind of loan?
Here is a blog I wrote about annual percentage rates.
https://gustancho.com/apr-versus-interest-rate/
gustancho.com
APR Versus Interest Rate Quoted By Mortgage Lenders
APR Versus Interest Rate: APR is different than the actual mortgage rate of a loan. This is because it reflects all the costs of the loan in terms of rate
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Gustan
AdministratorAugust 8, 2024 at 4:35 am in reply to: Steve Jobs Inspirational Commencement SpeechI can talk about Steve Jobs’ famous Stanford commencement speech and how it can relate to mortgage loan officers and real estate agents in today’s economy. Let’s go through it:
Connecting the dots (Trust your journey)
He mentioned dropping out of college and how unrelated experiences like taking a calligraphy class would later become significant in his success with Apple.
For mortgage and real estate professionals:
Take on different experiences and pursue learning opportunities even when they initially seem irrelevant.
For example, a loan officer who studies psychology may better understand clients’ emotions throughout the stressful mortgage process.
Scenery: An agent with an interior design background can give valuable staging advice to make them stand out in a competitive market.
Love and loss (Find what you love)
Jobs talked about being fired from Apple, the company he had co-founded; this led him to start other businesses, such as NeXT and Pixar.
For mortgage and real estate professionals:
Passion for your work will keep you through tough times when markets are down. For example, even during difficult periods, a loan officer who genuinely enjoys assisting first-time homebuyers might decide to specialize in this area and become an authority figure.
Case Study: When a real estate agent loses a big client, they can take it as an opportunity to re-evaluate their business model and find more fulfilling niches instead.
Death (Live every day like it’s your last)
He shared that getting diagnosed with cancer changed his view on life & work always.
For mortgage and real estate professionals:
Focus on what counts in your career or personal life.
Example: A loan officer could choose building genuine relationships with clients over short-term gains as their main goal
Case scenario: In uncertain times, where markets are always shifting up and down radically, Agents might want to invest some hours into community activities to build stronger local networks that can help them establish solid reputations over time.
Applying these lessons in today’s economic environment:
Adaptability: Just as Jobs connected unexpected dots, professionals should be open to new technologies, regulations, and market trends.
Resilience: The “love and loss” story encourages perseverance. This might mean exploring new business models or niches in a tough market.
Purpose-driven work: Jobs’ reflection on mortality emphasizes doing meaningful work. This could translate to focusing on how your work positively impacts clients’ lives rather than just chasing numbers.
Continuous learning: Jobs’ diverse experiences contributed to his success. Ongoing finance, technology, and communication education can be invaluable in the mortgage and real estate fields.
Innovation: Jobs was known for innovation. Finding creative solutions for clients (like alternative financing options or unique property marketing strategies) can set you apart in a volatile market.
Regarding Steve Jobs’ biography
- Born in 1955 and adopted as a baby.
- Co-founded Apple Computer with Steve Wozniak in 1976.
- Invented the Macintosh computer in 1984, which changed the game for personal computing.
- They left Apple in 1985 after losing a power struggle to John Sculley.
- I founded NeXT Computer and bought Pixar Animation Studios.
- They returned to Apple in 1997 to rescue the company from near bankruptcy.
- Oversaw creation of iMac, iPod, iPhone, and iPad, among other iconic products.
- He is known for his visionary approach to technology and design.
- He battled pancreatic cancer until his death in October 2011.
This story concerns innovation, resilience, and transformative impact across multiple sectors. His life touched the world because he shared what he learned, always connecting it back to those listening.
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Gustan
AdministratorAugust 8, 2024 at 1:55 am in reply to: What is TRID RULE? How Does TRID WORK in MortgagesWhat is TRID?
TRID stands for TILA-RESPA Integrated Disclosure. It was created to simplify the mortgage loan process by combining the disclosures required under the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). The objectives of TRID are:
Greater Transparency: Offer borrowers clearer and more concise information about their mortgage costs and terms.
No Surprises: Help borrowers avoid unexpected expenses at closing time.
Streamlined Disclosures: Merge multiple forms into simpler, more user-friendly documents.
Consumer Protection: Give consumers enough data to make informed decisions about their mortgage loans.
TRID in the Mortgage Loan Process:
Two main forms are required under TRID regulations:
Loan Estimate (LE): This document outlines an estimate of loan terms and closing costs. It must be given to a borrower within three business days after receiving a loan application.
Closing Disclosure (CD): This form shows final mortgage terms and costs. It must be given to a borrower at least three business days before closing a loan.
Requirements of a TRID Loan:
These are key requirements that all TRID loans should meet:
Delivery Timeframes for Disclosures: Within three business days of receiving an application for credit secured by real property, lenders must provide applicants with good faith estimates of credit costs and transaction terms on Loan Estimates.
Accurate Information:
- The information on Loan Estimates must be accurate and reflect all material terms.
- This includes interest rates or payment changes due to adjustable-rate features.
- Fees charged during closing include points or origination fees.
- Charges are imposed solely because credit was extended below par value or rebated upon full prepayment within three years from the consummation date.
- This excludes the amounts paid to persons other than creditors.
- It also excludes affiliates who do not regularly participate significantly in residential mortgage transactions involving extensions above par value.
Good Faith Estimate: The Loan Estimate should indicate costs and fees in good faith, meaning they must be close to the final amounts shown on a Closing Disclosure.
Delivery of Closing Disclosure:
- Creditors must provide borrowers with copies of all corrected closing disclosures at least three business days before the scheduled closing date.
- The closing disclosures need to reflect any changes made after consummation.
- The disclosures required under §1026.19(f)(2)(iii) are provided to such consumers.
- If revised estimates are provided under it irrespective of whether an event requiring redisclosure has occurred before it, but not later than one business day before consummation if changed circumstances result in a revised APR or other change requiring delivery under §1026.19(f)(2)(ii).
Handling Changes: If loan terms or costs significantly change, revised Loan Estimates and Closing Disclosures need to be provided depending on when the change occurs, and enough time must be given for borrowers to review these changes.
The 6 TRID Requirements: A complete application consists of six pieces of information:
- Borrower’s Name.
- Borrower’s Income.
- Social Security Number (to obtain a credit report).
- Property Address.
- Estimated Value of Property.
Amount of Loan Sought
Once the lender has received these six pieces, it is considered that they have everything necessary to issue a loan estimate within three business days.
Rules for TRID Compliance:
To be compliant with TRID rules and regulations, lenders need to follow these rules:
Deliver Disclosures Timely: Provide the borrower with both Loan Estimates and Closing Disclosures within their respective time frames.
Good Faith Estimate Requirements: Expenses and fees disclosed must be done in good faith, meaning they reflect actual costs incurred by lenders, except where otherwise exempted from this requirement under Regulation Z section 1030.2(a)(3).
Tolerance Levels: There are certain limits allowed for changes between what was disclosed in the Loan Estimate versus what appears on the Closing Disclosure:
Zero Tolerance: Certain charges, such as the Lender’s Lender’s transfer taxes, cannot be increased.
10% Tolerance: Some fees may change, but the total cost cannot increase more than 10 percent (e.g., Recording fees or third-party services).
No Tolerance: A few charges can change without limit (e.g., prepaid interest, property insurance premiums).
Revised Disclosures: If a significant change occurs, an updated Loan Estimate or Closing Disclosure must be provided enough time for borrowers to review it.
Record Keeping: All Loan Estimates should be kept on file for at least three years, and a Closing Disclosure for 5.
Compliance with Timing Requirements: To avoid delaying the closing process, timing requirements must be met for disclosures, redisclosures, and disclosures.
Understanding and adhering to TRID requirements in mortgage loans is important to promoting redisclosures, protection, and transactional ease.
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Great story. This story applies to everything in the world we live in.
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Absolutely, Tina. Comprehending the Annual Percentage Rate (APR) on mortgage loans can be challenging. Let’s make it easier to understand by using examples and situations. The APR is a wider measure of the cost of borrowing money, including interest rates and additional charges. Below are some instances that will help us understand how APR works out.
Scenario 1: Simple Fixed-Rate Mortgage
Loan Details
Loan Amount: $200,000
Interest Rate: 4% per annum
Term: 30 years
Upfront Fees: $3,000 (origination fee, closing costs, etc.)
Calculation:
Monthly Payment Calculation:
Monthly Payment= (1+r)^n/(1+r)^n-1 * P * r
- Where P = Loan amount ($200,000).
- r = Monthly interest rate (0.04/12).
- n = Total number of payments (30 years × 12 months = 360 payments)
\text{Monthly Payment} = \frac{200,000 \times 0.003333 \times (1 + 0.003333)^{360}}{(1 + 0.003333)^{360} – 1} \approx $954.83
Total Interest Paid:
Total Payments=954.83×360=343,738.80 Total Interest=343,738.80−200,000=143,738.80.
APR Calculation: The APR considers these upfront fees or treats them as part of the total loan cost when we calculate an effective interest rate on this broader basis. Effective Loan Amount=197,000 For simplicity, we assume the same monthly payment so that the new monthly payment in this situation would be approximately equal to the old monthly payment. New Monthly Payment ≈$954.83. Thus, APR ≈4.1%.
Scenario 2: Adjustable-Rate Mortgage (ARM)
Loan Details
Initial Loan Amount: $200,000
Initial Interest Rate: 3% for the first five years
Adjusted Rate: After five years, adjusts to 4.5%
Term: 30 years
Upfront Fees: $2,000
Calculation:
Monthly Payment for Initial Period:
Monthly Payment (Initial) = (1+r)^n/(1+r)^n-1 * P * r Where, P = Initial loan amount ($200,000) r = Monthly interest rate (0.03/12) n = Total number of payments in initial period (5 years × 12 months = 60 payments)
\text{Monthly Payment (Initial)} = \frac{200,000 \times 0.0025 \times (1 + 0.0025)^{60}}{(1 + 0.0025)^{60} – 1} \approx $843.21
Monthly Payment After Adjustment:
Recalculate the loan balance after five years (60 payments): Remaining Balance≈181,363.15 \text{Remaining Balance}\approx181,363.15.
Adjusted monthly payment: Monthly Payment (Adjusted) = (1+r)^n/(1+r)^n-1 * P * r Where, P = Remaining balance after adjustment ($181,363.15) r = Monthly interest rate after adjustment (0.045/12) n = Total number of payments in remaining period (25 years × 12 months = 300 payments)
\text{Monthly Payment (Adjusted)} = \frac{181,363.15 \times 0.00375 \times (1 + 0.00375)^{300}}{(1 + 0.00375)^{300} – 1} \approx $917.63
Total Payments and Interest:
Total Payments (Initial 5 years)=843.21×60=50,592.60 Total Payments (Remaining 25 years) =917.63×300=275,289.00 Total Payments=50,592.60+275,289.00=325,881.60 Total Interest = 325881.6 – 200000 = $125,881.6.
APR Calculation: The A, PR includes the up fees and the change interest rates. Effective Loan Amount=198000 Using the payments calculated above gives us a slightly higher value for APR than the nominal interest rates because it averages between two different rates plus fees caused by a change in rate. APR≈3.6%.
The annual percentage rate (APR) accurately represents the loan’s actual cost, including interest and fees. It is higher than nominal interest rates, which only account for this one component. Calculating it can be complicated because different lenders charge various additional costs, such as fees or points, along with varying interest rates throughout timeframes; however, here are some simplified examples that should help clarify things.
Please let us know if there are any other problems or if calculations need to be made based on more complex situations!
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