photo credit: darkpatator

If you have made some mistakes in the past as far as your credit is concerned, brace yourself for the facts about bad credit loans. You should first try to assess just how bad your credit is before you hit the panic button though. Very often, bad credit items that appear on your credit report can be challenged and sometimes removed. In addition, mistakes on your credit report can have an adverse effect on your credit score, shunting you into the category of a high credit risk. Items that are good news for you but do not show up on your credit report (or on one or the other of the credit reporting bureaus’ file on your credit history), can cost you some valuable points. Last, but not least, taking bad advice from well-intentioned relatives or friends can lower your credit score, making you a candidate for bad credit loans.

Bad news first

Let’s look at these possibilities for improving your credit rating one at a time. But first, let’s get the hard core issues out of the way. If you have had bad credit issues in the past and know you have made some wrong choices that may have landed you in bankruptcy or wage garnishment, it will be almost impossible to fix your situation in the short term. Medical emergencies have unavoidable consequences as well but none of these means you will not be able to find a lender of last resort.

If you are reading this you are probably at the point where you have decided to turn around your spiraling credit history, but know for sure that this will take time and will cost you money. Bad credit lenders will equate you with high risk and assign a high interest rate to whatever type of loan you are seeking in order to offset some of the risk that you may not pay back their loan on time.

Bad credit car loan

Let’s say you are in the market for a car. You will be required to make a hefty down payment on a bad credit car loan. I have heard of down payment requirements as high as $3,000 but that is not the only problem you face. Your interest rate on a bad credit car loan may range from 19% on the low end to as high as 29% on the top end. A high-mileage used car could end up costing you $400.00 or more per month in monthly payments. To minimize the damage from these high rates, I would suggest you start by calling several lenders. They usually both sell and finance the product on the spot. If you can find one whose maximum interest rate is in the low twenties you may be able to save a substantial amount of interest payments. You must make sure though, that they report your payment history to the credit bureaus as this will help to improve your credit score provided you pay on time.

Bad credit personal loan

Bad credit personal loans are issued by a variety of sources. Here again their emphasis will be on charging you a high interest rate to cover the risk of your defaulting on the loan. Payday loans are an example of bad credit personal loans that carry enormously high rates of interest as they are calculated over a short time span and are designed to get you to the next paycheck.

Other types of personal loans include equity-backed loans. Let’s say you have a home or some other asset that is almost or fully paid off. Local and regional banks or home equity specialists will lend you money using your asset as collateral. Although a loan of that nature will be safer for the lending institution, your past credit history will force you into a bracket paying somewhere around 21%, despite the use of your collateral.

Bad credit mortgage loan

This is the big ticket item that will cost you dearly over the life of the loan. Consumers with credit scores above 650 may find themselves paying say, six percent on their mortgage loan, depending on the prevailing interest rates at the time of their purchase. If you have bad credit, you should be prepared to pay two and a half to three percentage points more and sometimes into double figures on your mortgage rate. Depending on the prevailing economic circumstances you may find it very difficult to get a mortgage at any rate. You can expect that any lender looking at your loan application will expect you to have a substantial down payment in hand, ranging from 10% to 20% of the value of the home you are trying to purchase.

Not only should you expect to face a high interest rate, but also, your lender will require you to purchase private mortgage insurance to cover the risk of your defaulting on a payment. If your down payment is higher than 20% of the cost of the home you are buying, you may be able to negotiate away paying PMI, even on a bad credit mortgage loan.

As with a bad credit car loan, your history of on-time payments will begin to raise your credit score over time. Given a record of good payments, you may be able to refinance at a more reasonable interest rate. But before you sign for your bad credit mortgage loan in the first place, be sure to check the penalties for getting out of the loan early. Pre-payment penalties may be enormous and most people are so excited to get a bad credit mortgage loan, they neglect to consider what may change three years down the line.

photo credit: f_mafra

Cleaning up bad credit items

Let’s say your situation is so bad that you can’t find a lender willing to risk lending you money. Where do you go from here? You could wait a few years until bad credit items on your credit report fall off, usually in seven years for most items. Or you could begin the process of cleaning up your credit report as even a difference of a few points on your credit report score could make the difference between getting a loan or a refusal. If there are items on your credit report that are incorrect or should have been removed because of their age, write the credit bureaus and request their removal. They are required by federal law to make those corrections.

Mistakes on your credit report can be caused by human error. An account with a bad history could appear on your report because a clerk typed someone’s social security number one digit off. Rest assured, it happens. You could end up being saddled with someone else’s court record but you wouldn’t know until you inspect a copy of your credit report.

Include the good news

If you have paid off a delinquent account in the past but it does not show on your credit report, you will want to present proof of payment to the credit bureaus and have their records corrected. That can mean a few points on your credit report score.

You may find that a car note you have paid off was never reported to the credit bureau and though your payments were all on time, you are not receiving the benefits of that piece of good credit history. Contact the lender and ask them if they will report your credit file to the bureaus.

A word of caution

Well-intentioned friends and family often “hear” that you should do this, or that, to raise your credit report score and improve your chances of getting a bad credit loan. The most popular advice is that you should close your credit card accounts. This may sound reasonable but may affect you adversely. Make sure that if you take that route, you do not close the accounts with the longest history. It may be safer to close newer accounts but you should know that part of your credit report score is calculated by looking at the ratio of outstanding debt to total available credit. Close some accounts, lower your available credit and your score could go down.

Douglas Michaels is an editor, publisher and columnist. He works in the financial industry and now dedicates his time to helping others educate themselves on improving their credit scores. For more tips on credit matters read his blog or visit his website at http://www.my-credit-report-score.com

FHA loans have allowed Americans who generate lower income than the average to borrow money so that they could buy their own home. If it weren’t for the FHA loan, they wouldn’t be able to afford it.

So whenever one asks you the question, “What is a FHA loan?” You can answer his question by stating that it is one of the best things that ever happened to the blue collared American. The program started in the 1930s during the Great Depression.

The rates of the foreclosures rose so fast that the program was initially started so that the lenders would be able to come up with the sufficient insurance to those who would want to borrow money. In fact, some FHA programs have been subsidized by the government.

The goal is to make this self-supporting depending on the insurance premiums that have been paid by the borrowers.

Over a period of time, the PMI companies or the Private Mortgage Insurance companies entered the picture. Now, the FHA serves those who cannot shell out the down payment or do not qualify for the requirements.

It is hard to explain to a person who asks, “What is a FHA loan?” without elaborating on the details that have already been mentioned in a previous paragraph.

Going back to the history of the FHA loan, it was established to reduce the unemployment rate and increase home construction. At the same time, it is meant to operate as a loan insurance program.

The FHA does not have to make loans nor should it build houses, much less plan it. This is covered by the VA loan programs. If however, the VA qualifies for an FHA loan as well, the financial organization must then ask whether the borrower wants the insurance from his FHA or he can rely entirely on his VA loan.

Either way, those who want to know more about the answer to the question, “What is a FHA loan?” will realize that the VA loan and the FHA loan go hand in hand because this allows the veterans to make the most out of their benefits the minute they resigned from their posts.

One thing that the FHA does not make are loans. Rather, it insures that the loans are provided by the private lenders.

The first step for anyone to get a lender or a mortgage broker that will assist you with your FHA loans.

Learn more about refinancing FHA loans at my site. Discover what are the FHA loan requirements before you apply.

Article Source:http://www.articlesbase.com/loans-articles/what-is-a-fha-loan-1339325.html

photo credit: karpov the wrecked train

You graduated and now your student loan is due. The job hasn’t come through yet, or you are just in over your head. What can you do about that student loan?

Before you enter the default stage, relax and review your options. Realize that you aren’t alone. Unfortunately, since so many former students default on their loans each year, the Department of Education has a well-oiled process of collecting payments from those who default.

If you just stop paying, or never begin making payments when they are due, you can expect the Department of Education to take action to collect your student loan. There are several drawbacks to procrastinating. First, they will add substantial collection fees to your outstanding balance. You owe enough already, but they are going to want extra to track you down and force you to pay.

The IRS works closely with the Department of Education, and they’ll take any tax refund that you might be due. That’s right, they’ll turn it over to the Department of Education without a second thought.

Finally, once you do get a job, they can garnish your wages. Not only will they get the collection fees and hit your take home pay, but your employer will know you defaulted on your loans as well.

If you default, your credit will be damaged. This will prevent you from getting the best available financing deals, a mortgage and possibly even a job.

Want to avoid all that hassle? First, realize that you do have options. Shirking your responsibilities should be the last option. Contact an Ombudsman at the Department of Education (877-577-2575). Review your options and choose one that you can live with.

photo credit: mynameisharsha

You may be able to defer your loans. This program allows you to defer, or put off, payments on principal, interest or both under some conditions. If you’re out of work but looking for a job, experiencing a financial hardship or going back to school you may be able to put off paying for awhile. You must apply and be approved, so be proactive and request the paperwork from your lender before you find yourself in default.

Most loans have a provision for cancellation. However, canceling a student loan is very difficult. If you meet one of the requirements you can apply for a cancellation by completing a form provided by your lender. Some of the qualifications include total disability, either permanent or temporary, death, providing instruction or other services to needy populations or entering a rehabilitation program for your disability. Serving in one of the armed forces may also allow you to cancel your student loans under certain circumstances. Cancellations are hard to obtain and will always require documentation of your condition or situation.

If you find yourself in extreme circumstances, student loans can be discharged through certain types of bankruptcy. However, you must be able to prove that if you repaid the loan you would suffer severe financial difficulty, and most student loans can only be discharged through Chapter 13 bankruptcies in which you must repay a portion of your debt (usually pennies on the dollar).

Whatever your situation, deal with your student loan problem before it enters default. Whatever choice you make, don’t ignore the problem. It won’t go away, it’ll only get bigger. Contact the Ombudsman at the Department of Education or your lender before you find yourself in default.You graduated and now your student loan is due. The job hasn’t come through yet, or you are just in over your head. What can you do about that student loan?

Before you enter the default stage, relax and review your options. Realize that you aren’t alone. Unfortunately, since so many former students default on their loans each year, the Department of Education has a well-oiled process of collecting payments from those who default.

If you just stop paying, or never begin making payments when they are due, you can expect the Department of Education to take action to collect your student loan. There are several drawbacks to procrastinating. First, they will add substantial collection fees to your outstanding balance. You owe enough already, but they are going to want extra to track you down and force you to pay.

The IRS works closely with the Department of Education, and they’ll take any tax refund that you might be due. That’s right, they’ll turn it over to the Department of Education without a second thought.

Finally, once you do get a job, they can garnish your wages. Not only will they get the collection fees and hit your take home pay, but your employer will know you defaulted on your loans as well.

If you default, your credit will be damaged. This will prevent you from getting the best available financing deals, a mortgage and possibly even a job.

Want to avoid all that hassle? First, realize that you do have options. Shirking your responsibilities should be the last option. Contact an Ombudsman at the Department of Education (877-577-2575). Review your options and choose one that you can live with.

You may be able to defer your loans. This program allows you to defer, or put off, payments on principal, interest or both under some conditions. If you’re out of work but looking for a job, experiencing a financial hardship or going back to school you may be able to put off paying for awhile. You must apply and be approved, so be proactive and request the paperwork from your lender before you find yourself in default.

Most loans have a provision for cancellation. However, canceling a student loan is very difficult. If you meet one of the requirements you can apply for a cancellation by completing a form provided by your lender. Some of the qualifications include total disability, either permanent or temporary, death, providing instruction or other services to needy populations or entering a rehabilitation program for your disability. Serving in one of the armed forces may also allow you to cancel your student loans under certain circumstances. Cancellations are hard to obtain and will always require documentation of your condition or situation.

If you find yourself in extreme circumstances, student loans can be discharged through certain types of bankruptcy. However, you must be able to prove that if you repaid the loan you would suffer severe financial difficulty, and most student loans can only be discharged through Chapter 13 bankruptcies in which you must repay a portion of your debt (usually pennies on the dollar).

Whatever your situation, deal with your student loan problem before it enters default. Whatever choice you make, don’t ignore the problem. It won’t go away, it’ll only get bigger. Contact the Ombudsman at the Department of Education or your lender before you find yourself in default.

Jay Moncliff is the founder of http://www.saving-loans.com, a website specialized on Loan resources and articles. This site provides updated information on Loan. For more info visit his site: Loan

photo credit: Vincent Boiteau

How many of you are biting your nails trying to figure out what you should do to get your college paid for? You know you need a loan… but what kind? What are the differences? Would it be a good idea to refinance or consolidate any loans you already have? Is this the right time? How much do you really need? What do college loans cover? If you’re wondering about these things, please read on.

Before you run out and get a college loan, you first need to know how much of a loan you are going to need. Of course, the obvious part of the loan is your tuition and the cost of your courses. But there are many other things that you may need to have covered through your college loan. This can be your room and board, school supplies, lab supplies, books, etc. But this just pertains to your actual schooling. There are other things you need to take into consideration. This can be car insurance, gas, transportation, health insurance, food, etc. You need to add all of these factors up for each year. Then, multiply it by how many years you are to be in college. This will give you a rough estimate of how much money you will need.

Some college loans can be used for anything. The lender couldn’t care less as long as you pay it back. If you plan on getting a part time job, you can count on part of your paycheck being used towards things that your college loan does not cover. However remember you’ll need to keep part of your paycheck to pay your monthly college loan payment!

Now we shall go over the several types of college loans out there. A little later, I will explain about refinancing a college loan.

First, we will go over federal student loans.
These college loans can either be subsidized or unsubsidized.

Subsidized loans are when the government pays the interest of the loan for the students. You must show that you are in great financial need in order to get this type of loan.

Unsubsidized loans are when the student must pay the interest, but the interest is not deferred until after graduation. Anyone can get an unsubsidized loan. Both of these types of federal student loans are the most commonly used.

The next are private student loans. Private student loans are given to someone with a good credit score. They can be used for anything, not just the cost of tuition. They are also unsecured. This means they require no collateral, but they have extremely high interest rates.

Now, we go to for parent loans. As you guessed, this is a loan that parents can take for the full amount of the college tuition. You just have to hope mommy and daddy are willing to do this for you! The payoff rate and interest rate is much lower with this type of loan, often because parents have good credit and the funds to pay the loan off.

photo credit: Vincent Boiteau

Now we come to consolidation loans. This type of loan is used to consolidate all of a student’s loans together so they can be paid off in one easy payment plan to one lender, rather than having several payments to several lenders. Many students end up getting this type of college loan after they made the mistake of getting too many college loans at once.

Those of you, who do already have a loan, may be interested in refinancing. Refinancing college loans often seems like a good idea, and it is…if you use it to your advantage. I’ll explain that in a minute. First, you need to understand a few things. Most college loans are of a variable percentage rate until the rate is locked. You lock a rate by means of a loan consolidation or by refinancing. When rates are very low, it generally is a good idea to attempt to get your loans or loan consolidated or refinanced.

Before you can even think of refinancing, you must know that is only offered to you good people that have always made their monthly loan payment on time. If this does not sound like you, then I wish you good luck trying to refinance!

Refinancing rates are usually one or two percent lower than your original college loan rate. Refinancing rates can save you up to 60 percent. But this is where the possible drawback is – and most people simply don’t realize.

The “drawback” is a hidden one – that most people never see. In order to get your college loan payment lower through refinancing, you are given a much longer time period to pay the loan off. Instead of 5 years to pay it off, it can turn into 20 years to pay it off! This may sound good to you in the beginning. At the time, it will leave you with extra money that you may be in need of for other bills. But in the long run, it just costs you more money because you will be paying interest much longer to the lender. In fact, it can cost you thousands more!

The smart way to do it is after you refinance and obtain the lower rate; pay more towards the monthly bill. This way you will pay off your loan much quicker than normal and at a cheaper rate. But only put more towards paying it off when you can afford it. Remember you refinanced your college loan because you couldn’t afford the payment to begin with. So now you’ve refinanced just pay off your loan as best you can at your own pace, bearing the above in mind.

I hope I didn’t scare you too much. The important thing you have to remember is that most lenders gain money from you through the interest you pay them. If you pay your college loan off faster, you will make the lender less rich! Take a breather and use your head before you jump into anything.

In other words “look before you leap”.

© Luke Sharp 2005

Luke Sharp is a valued member of the “Online Refinance” team. After the “Luke Sharp treatment” complicated subjects seem clearer. See more articles,”poemicles”, and lots of info on refinance at http://www.onlinerefinance.net

photo credit: Medmoiselle T

If you’re in debt, you may find that one of your problems right now is not so much lack of information as it is too much information! There are tons of sites online offering all kinds of debt solutions. Many of them call themselves debt consolidation, but that term is used so loosely it sounds like it could mean almost anything. Maybe you don’t care about terminology. After all, a debt plan that works is all that matters, right?

The fact is that you need to know all about these things in order to choose the right option for your situation. Picking the wrong one can cost you money (the last thing you need right now), hurt your credit, and keep you stuck in debt. Picking the right one can get you out of debt.

Let’s start with the one not on the list: bankruptcy. Believe it or not, Americans have a Constitutional right to go bankrupt.

Bankruptcy is a legal proceeding. You can’t declare bankruptcy in the U.S. without getting a lawyer and judge involved. The proceeding becomes part of public record. Bankruptcy is extremely intrusive in that outsiders will now determine how your money will be divided up to pay off debt and what you must sell.

Bankruptcy offers an advantage many debtors really love. A court has the power to issue “bankruptcy protection.” You may be allowed to write off certain debts. That means some debts just go away; you are no longer obligated to pay them. Furthermore, once you have “bankruptcy protection,” bill collectors can no longer pursue you for those debts.

The problem with bankruptcy is that it all but ruins your credit. It stays on your credit report for seven years, and it has a way of cropping up even after that. It makes it very tough to get new loans or buy a house. The loans you will be able to get will be at very high rates of interest because you’ve suddenly become a high-risk borrower.

Bankruptcy will turn your life upside down. If you have secured loans (like car notes or loans to buy electronic equipment), those things can be repossessed. The court may seize or order you to sell certain assets and take the money to pay off other debts. Another requirement is attending money management classes, kind of like being forced to go to debtors’ rehab.

While bankruptcy does have its place, it is definitely the “last resort.”

Debt settlement and debt negotiation mean roughly the same thing: you or somebody representing you sits down and talks to your creditors to work out a solution.

The principle is that you work out (negotiate) a way to end (settle) your debt. You may be able to get the interest rate reduced or the terms of payment changed (such as getting a couple of months off or extending the terms of the loan). Sometimes you negotiate to try to get the balance reduced. As an example, assume you owe $10,000. You would negotiate with your creditor to try to get him to accept less, say $5,000, and mark the debt paid in full.

Why would anyone do that? The main reason a creditor will negotiate a debt is that they suspect you are flirting with bankruptcy and they are fearful that if you go bankrupt, they won’t get anything. From their viewpoint, $5,000 may be better than nothing.

Debt settlement and negotiation plans will almost assuredly make it all but impossible to get future loans at reasonable interest (if at all).

A debt management plan (DMP) is a formal plan where you hand your problem off to a company which then negotiates your debt. You make one monthly payment to the DMP and they handle your problem.

While there are legitimate DMP programs out there, these are very treacherous waters. Do your homework and check with the Better Business Bureau as well as a certified credit counselor (nfcc.org) and maybe your bank or credit union. There are programs out there that are outright frauds and a few that are not dishonest but not exactly advantageous to the customer.

The last approach is something called debt consolidation. Ironically, many debt settlement, debt management plans, and debt negotiation companies will call their programs “debt consolidation.” That is not inaccurate, but it’s a bit misleading.

photo credit: bjornmeansbear

Debt consolidation simply means lumping all your debts together. In one way, that is what all debt plans do at first, whether it’s bankruptcy, a DMP, or some other program.

But pure debt consolidation involves lumping your debts together and then taking out one big loan to pay them off.

Why would anyone do that?

If you have a lot of high-interest loans, you may be able to take out lower-interest loans to pay them off. For instance, if you owe $10,000 at 22% on a credit card and you can borrow $10,000 at 10% from your bank, you would be smart to borrow $10,000 at 10% and pay off the credit card. You still owe $10,000, but you owe it at less than half the interest rate. If you keep making the same payments, you’ll pay the debt off much sooner.

If you own a house and can refinance it or get a home equity loan or second mortgage, you can use that to consolidate your debt. Let’s say all of your debts together came to $100,000 and you owed them at varying interest rates from 22% down to 10%. If you own a house and take out a second mortgage (or use another refinancing option), you can borrow $100,000 and pay off all of your debt. You can structure this second mortgage as a 30-year loan and probably get it at 7% or even lower. The result is a significantly lowered monthly payment and a boatload of individual loans you can stamp “paid in full”.

Debt consolidation offers a lot of advantages. (That’s why so many programs like to call themselves debt consolidation!)

It is the only debt solution that can actually help your credit score (your credit score goes up whenever you pay off loans in full). If you are willing to take the time to learn a few things, you can do it yourself (no fees or other people to pay). It’s not intrusive; in fact, if done properly, no one would ever guess you did it. Even if your bank or a lender figured it out-they would probably think you’re smart to handle your debt that way.

If you can figure out how to do a pure debt consolidation on your own, you don’t need to bother with hiring a company (or a lawyer), entering financial rehab, or paying off agents to “manage” your money.

In the interest of fair disclosure, however, it must be stated that debt consolidation in its pure form will not work for everyone. Some people will not qualify for it. There are others who might indeed qualify for debt consolidation, but will find another plan is more to their advantage. It’s important to learn what you can to find out if debt consolidation is right for you.

For straight talk about debt consolidation from a site that sells no financial services or programs, click to http://www.MyDebtConsolidationAnswers.com – Every day you stay in debt is costing you and your family money and future prosperity. Get the facts today.

photo credit: TheTruthAbout…

In order for you to get your best deal on a mortgage you must first understand the types of companies that are offering mortgage products. Learn how they make their money and half the battle is won! These mortgage companies can be simplified as:

• Brokers
• Broker/Lenders
• Mortgage Lenders
• Banks

Before we continue, I need to stress this single point. There ain’t no free lunch! All companies are in business to make a profit. If your intention is to get someone to work on your loan for free, you will get what you pay for.

Mortgage companies will make their money in one or more of these four categories, no exceptions.

Fees – Fees charged to the borrower, seller, builder or realtor included in the closing cost of the loan. They are often referred to as “front end fees”. These take the form of junk fees, (fees that are in excess of the actual cost of the service or are not representative at all of any service), origination fees and discount fees. More on this.

Yield Spread – Yield spread is when you qualify for one rate and are sold or closed with a higher rate. The company then makes an economic profit in the form of basis points against the loan amount from the institution they plan to sell the loan to. Incidentally, this is how “no closing cost” loans are done.

Securitization – This is when a lender packages loans as a group, FHA, Conventional, B or C grade loans and sells them on the securities market. A good example is an FHA loan. These groups of loans have a set, if you will, default rate. We know as lenders that xxx amount of these loans will go into default. We also know that xxx amount of these loans will go to term and pay all the interest on the loan scheduled to be paid. These loans as a group represent a dollar amount to other lenders who need to fulfill “money line” quotas. Therefore they can be sold at a premium above the face value of the loans they encompass.

Servicing – This is earning a profit the old fashioned way. Actually holding the loans that you originate to collect the interest that accrues on them that are above the price of the money you purchased to make the loan. Incidentally, this is the least used way institutions use to earn a profit.

This list below simplifies a large diversity of mortgage lending businesses; to a greater extent most mortgage companies will fall into one or more of these business models:

photo credit: Karen Eliot

Brokers

Brokers do just what the name implies they broker. They are registered or work in conjunction with a host of different lenders in order to offer a wide array of products. Each bank, lender or correspondent that they deal with has its own niche and lends diversity to the pool of loan programs the broker can offer. It is not uncommon to find a broker with dozens of correspondent lenders. Brokers typically do better with credit challenged clients.

Pros – They can offer many more programs than most traditional lenders and banks. They are usually smaller companies and can work with consumers on a one on one basis. They can usually get you a better rate than you would get if you were to directly apply with the institution they are using.

Cons - They have no underwriting authority. They are at the mercy of the banks and lending institutions they deal with as far as lending decisions. They typically take longer for approvals and have higher fees. They are charged “broker fees” from the institutions they deal with and pass them directly to the consumer in one form or another. They pull your credit and submit it to other banks and lenders to re-pull your credit to see if you qualify for the programs their investor offers. This creates more inquiries on your bureau, which typically brings down your FICO score.

How They Make a Profit - Brokers tend to make their money in fees and yield spread. Brokers offering “no closing cost loans” are selling you a higher rate to re-capture the actual cost of doing the loan plus make a profit. They will typically have junk fees that represent profit to the broker i.e. processing fees, funding fees, underwriting fees. The reason I call them junk fees is most if not all brokers do not underwrite their loans, pay their processors by the hour and table fund in the individual investors name they used to get you the loan.

Broker/Lenders

Broker/Lenders work very much like the Broker category above. The only difference is that they possess a line of credit or have a slush fund from which they “lend” from. Like the broker, they have the loans earmarked for immediate sell to individual investors to get their money line replenished for the next loan.

Pros - They can offer many more programs than most traditional lenders and banks. They are usually smaller companies and can work with consumers on a one on one basis. They can usually get you a better rate than you would get if you were to directly apply with the institution they are using. Added “Pro”, they have the ability to close loans on their timetable, which is an advantage over just plain brokers.

Cons - They have limited underwriting authority. They are at the mercy of the banks and lending institutions they deal with as far as lending decisions. They typically take longer for approvals and have higher fees. They are charged “broker fees” from the institutions they deal with and pass them directly to the consumer in one form or another. By having “Lender Status” in some states like Georgia, they can usurp the 5% cap on fee’s and profit by not disclosing the profit they make on yield spread by selling the loan at a premium.

How They Make a Profit – Broker/lenders tend to make their money in fees and yield spread. Brokers offering “no closing cost loans” are selling you a higher rate to re-capture the actual cost of doing the loan plus make a profit. They will typically have junk fees that represent profit to the broker i.e. processing fees, funding fees, underwriting fees. These are typically the companies advertising “we are a lender” no closing cost and so on.

Mortgage Lenders

Lenders typically have their own set of guidelines and programs and may tend to specialize in a specific niche of the market. They sell their loans and service their loans respectively. Typically the average mortgage lender, Opteum Financial, Homebanc, Countrywide, will securitize their loans 2 to 5 times a year. That is, they will sell their loans on the open market in bundles such as Fannie Mae, Freddie Mac and FHA insured loans. Also they will usually have “portfolio products”. These are niche products that differ from conventional mortgage types and offer them market share within a certain niche of the market.

Pros – Lenders are usually cookie cutter type organizations with more protocols, guidelines and consumer protection policies in place than the aforementioned companies. This is not to say the other companies aren’t’ customer oriented, it is to say they are characteristically less automated in their procedures. Mortgage lenders are usually where the “expert loan officers” land with their career decisions. Lenders are more apt to give full disclosure, lower fees and some sort of a service guarantee. They are usually the people who have pre-arranged deals with Realtors, Builders and other real estate professionals due to their high volume and multi-state capabilities. Lenders employ their own underwriters, processors and funding departments; this usually means a quicker deal with fewer surprises.

Cons - Mortgage lenders have a higher operating cost over brokers. Typically they will employ their own underwriters, processors and funding department. This may equate in their rates they offer their clients. However, most conventional rates i.e. Fannie Mae, Freddie Mac and FHA loans which represent the bulk of loans done by all mortgage companies are usually within a 1/8th of a point from each other when compared.

How They Make a Profit - Lenders make a profit all four ways mentioned above. They securitize, have fees, generate yield spread and service their loans. The advantage is they have all avenues available and tend to be below average on all of them. In other words, Mortgage Lenders do not need to make all of the profit in fees; they can hold the loan and cut the fees. Or they can sell it in a sensitization package and recoup any losses they may have incurred in the loan. In other words, they have full discretion to do any loan that makes sense.

Traditional Banks

Traditional banks are usually where all loans end up. Banks like, Chase, Bank of America, Wells Fargo and so on. What sets them apart is they are in the business of holding and servicing loans. They are the major buyers of securitized loans from lenders on the open market. The difference is, they are banks that happen to have mortgage departments, not the other way around like lenders.

Pros - Traditional banks are just that, banks; the chance of having your loan sold is far less likely than with the other lenders. Local banks that service their loans can offer the “good ole boy ” network and can usually make loans to farmers and local citizens in small town America with extenuating circumstances. They offer a face to associate with when paying your mortgage if you happen to bank with them. They offer competitive rates, although their most competitive rates can be found offered to their correspondent Brokers to resale to you.

Cons – As mentioned above, banks are unfortunately banks, which happen to have mortgage divisions. They tend to have program A, B and C. If you do not fit one of the programs, tough! Expertise is another con, meaning you are usually speaking with a customer service person instead of a mortgage professional. I hear month after month from customers who have started the process with the “Great American Bank” only to be told they do not fit the guidelines 30 days later.

How They Make a Profit - Banks make profits exactly the way Mortgage lenders do, but the emphasis is shifted to servicing of the loan.

To sum all of this up, ALL mortgage companies are in business to make a nickel or two. The companies that say “Ill do your mortgage for free” or “zero closing cost” are hiding the fees within their rate markup. My recommendation is to work with lenders or brokers who explain this option up front and explain the advantages and disadvantages to structuring your mortgage this way.

Aubrey Clark Editor http://lendfast.com

photo credit: VisitMyLuxuryHome.com

Introduction

Mortgages are loans that are used to purchase real estate and come in many different forms. The most common types are Conventional, FHA and VA. Other types are Second, Reverse and Balloon Mortgages. These loans often involve the use of Discount Points.

Conventional

The conventional loan is the most common type of mortgage used in the nation today. Conventional mortgages are loans between borrowers and lenders that are not insured or guaranteed by the government. Conventional mortgages are either privately insured through private mortgage insurance companies or not insured at all. Conventional loan guidelines typically require a minimum down payment of five percent on owner-occupied (non-rental) properties; higher for investment/rental properties. For mortgages that have a down payment of less than 20%, private mortgage insurance (PMI) is usually required. Most conventional mortgages have time frames of 15 to 30 years and may be either fixed-rate or adjustable.

Fixed rate mortgages mean that the interest is permanently “fixed” at the rate available when the mortgage was created. The interest rate never changes no matter what interest rates do later. Fixed rate loans provide a level principal and interest payment that a borrower can depend on and are especially attractive when rates are low.

Adjustable rate mortgages mean that during the first few years, the interest rate will be lower than a typical fixed rate loan but will increase (adjust) upward to rates that are prevalent at a later date. Adjustable rate mortgages are normally used only when the borrower cannot currently qualify for the normal fixed rate interest level, but anticipates a larger income in the near future. The risk for the borrower is if that extra income does not materialize or if other expenses occur later on that cause the adjusted rate to not be affordable.

FHA

FHA loans are insured by the Federal Housing Administration, which is a division of HUD. The program was created in 1934 to stimulate the housing market during the Depression. FHA loans are insured by the government against default, but the mortgages themselves are made by major private lenders. FHA loans are often available from the same lenders who offer conventional loans. FHA maximum loan amounts are limited, and the maximum loan amount varies among geographic regions. High cost housing markets will normally have a higher maximum loan amount than lower cost areas. FHA mortgages are usually on a fixed-rate mortgage with terms of up to 30 years. FHA can lend up to 97% of the home value, and can be refinanced any time without a pre-payment penalty, and without having to qualify all over again. FHA insurance makes it possible for private lenders to provide mortgages to lower income families without attaching the rates and fees that sub-prime lenders do. FHA-insured loans have become an important element in the proposed solutions to the subprime mortgage crisis, and an FHA Reform package is making its way through Congress and will probably be a reality by the time you read this. The new package will enable FHA to accept even lower down payments and credit scores than they do now.

photo credit: Army.mil

VA

VA mortgage loans are loans insured by the Department of Veterans Affairs. The program was created in 1944 during World War 2 to assist returning military personnel in buying a home. VA mortgages are reserved for those who have served in the military or are currently in the military in active or reserve status. They are also available to qualified surviving spouses. VA loan guaranty is only for owner occupied properties, which can include homes, condominiums, townhomes, 2-4 family properties and manufactured homes, as long as it is owner occupied at least in part. By example, the applicant can obtain a mortgage for a duplex, live in one side and rent out the other side. VA mortgages offer the qualified veteran or active duty military person an opportunity to buy a home up to a specified amount with no down payment and do not require Private Mortgage Insurance (PMI). Like FHA mortgages, VA places a limit on the maximum mortgage amount. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a loan.

Balloons

A Balloon mortgage is a loan that is usually a short-term fixed-rate loan with even monthly payments amortized over a stated term, but provides for a lump sum payment to be due at the end of a specified term. These loans can be used as either a first or second mortgage. The nature of balloons are that the principal is not paid off entirely during its term and the monthly payments are often lower than they would be in a fixed rate first mortgage. Balloons are often used as a type of Second mortgage, especially when a borrower is seeking the lowest possible monthly payment in the short run. These loans carry an inherent risk for the borrower because that large lump sum becomes due and payable at the end of the term, so these financing options should be used with extreme caution.

Reverse

Reverse mortgages are becoming popular in America. They were designed only a few years ago and were made to help people who have retired and stopped working, but still have to make monthly payments. They are a special type of financing that lets a homeowner convert the equity in his/her home into cash. Reverse mortgages can be relatively complex, and their use should be considered carefully by the borrower. While they have been around for a long time, but it wasn’t until the early 1990s that they began earning respectability after the FHA began insuring reverse mortgages for repayment to lenders.

Second

These are used when a borrower needs additional financing to buy a home. Second mortgages are subordinate, meaning that in the event of default, the primary, or first lien would get paid off first, and then any funds remaining would be used to pay off any second liens. Second mortgages are also arranged for various purposes, such as financing home improvements, college tuition fees, debt consolidation or other emergency expenses. They are available as either fixed-rate loans, or adjustable-rate home equity lines of credit and are based on the market value of the home minus the balance of the first mortgage. Terms are typically shorter than the primary term and are commonly written at a higher rate of interest, due to the inherent risk of the loan. An advantage for the borrower is that the interest paid on a second mortgage is tax deductable, whereas payments for PMI are not.

Discount Points

Discount Points are used to buy your interest rate lower and are charged as a percentage of the loan amount. Discount points are entirely optional unless they are required for you to qualify for the loan payment, due to a lower than required income or higher than expected expenses. Discount points are paid in cash at closing and are typically charged to the seller. A common arrangement is that when discount points are charged, the seller will want to increase the price of the home to cover this expense. The result is that 80% or more of the discount point cost is actually financed by the buyer. Discount points are not to be confused with an origination or broker fee and are tax deductible only for the year in which they were paid.

Harry E. Davis is a Texas state certified residential real estate appraiser in Texas and is webmaster of the FHA Appraiser Directory Appraiser. Appraisals are available at Austin Texas Appraiser.