Diane Horrigan's Blog
Potential home buyers should obtain a pre-qualification letter from their lenders to access a home loan. This letter communicates what the lender thinks about you being qualified for a mortgage up to a certain amount and is dependent on the data you gave about your assets, income, and expenses.
Pre-qualification is just the primary step, and it provides you with an idea of how much of a loan you will potentially qualify for. This process relies on consumer-submitted information.
Pre-qualification entails providing the lender with your overall financial picture, including your credit, debt, income, and assets. The lender evaluates everything and gives you an estimate of the amount you are expected to be able to borrow.
Pre-qualification can be conducted over the phone or via online, and there is no cost attached. It is usually a quick process, taking from one to three days to obtain a pre-qualification letter. Remember that loan pre-qualification does not include a review of your credit report or a detailed look at your ability to buy a home. Instead, it is only dependent on the data you provided to the lender. By extension, it doesn't mean much at all if you provide inaccurate information.
The first step in the pre-qualification process allows you to talk with your lender about any needs or goals you might have regarding your mortgage. Then, your mortgage lender can tell your various mortgage options and discuss the type that might be the most suited for your needs.
Some brokers go the extra mile of requesting home buyers to have pre-qualification before working with them. The letter would signify that a lender has already started talking with the buyer. A properly-written pre-qualification letter clarifies that you are using a quality, legitimate lender who can be reached for verification and confirmation.
According to many real estate agents, in a highly competitive market, a pre-qualification letter might not be enough. This is a significant drawback in using and relying only on a pre-qualification letter for proof of ability to purchase a home. If you need to buy immediately or don't want to miss out on a great deal in a trending area, you may need to be pre-approved as well. Pre-approval is a more complicated process and can impact your credit score, so speak with your agent about which is the better option for your situation.
You may have heard the term “escrow” in your experience with real estate. You might know it’s an account, but what exactly does it do for you as a buyer? An escrow account is what your lender uses to make payments on things like property taxes, insurance, and more. The lender collects your monthly mortgage payment, and part of that cash goes into an escrow account.
This type of account is an excellent option for homeowners because your bills relating to being a homeowner will all be paid without you having to do anything. It makes budgeting a breeze because there aren’t any complicated calculations involved. Every month, your lender collects 1/12 of the estimated tax bill and insurance cost for the home. The rest of your mortgage payment covers the principal and interest on the loan of the house.
Are Escrow Accounts Mandatory?
You’ll find that most lenders require you to have an escrow account. The purpose of the account is to keep the home safe as collateral for the loan. The bank has an interest in the proper insurance behind the property. The taxes also need to be paid on time in order to keep the property in good standing. If the taxes aren’t paid, a tax lien will be placed against the house.
Everything In One Place
You’ll receive an annual statement from your lender that will show you how much money was collected and placed in your escrow account. Escrow payments often change because insurance premiums and taxes tend to change quite frequently. The amount being put into escrow may change a few times throughout the year. The lender keeps track of all this for you, saving you some time.
Bills That Need To Be Paid
Whether you have an escrow account or not the bills that are included must be paid one way or another. It’s a good idea to speak with your lender before you buy a home to find out that bank’s procedures around these insurance and tax payments. Property tax and home insurance are items that you’ll need to budget for regardless of how your lender does things. An escrow account can be much more convenient for many buyers.
Escrow is just another one of the many essential terms that you’ll come across as a homebuyer. Knowing the advantages and purpose of the account helps you to be informed as you dive into the home buying process.
Ginnie, Freddie, and Fannie are friends of the real estate mortgage and housing industry. You hear about them whenever you read very deeply about how mortgages work. But who are they? And what do they have to do with you?
What’s in a name?
These three entities are nicknames for mortgage agencies established by the United States Government. Freddie and Fannie are siblings, while Ginnie is more of a cousin.
- Fannie Mae is the nickname for FNMA-the Federal National Mortgage Association.
- Freddie Mac is the nickname for FHLMC-the Federal Home Loan Mortgage Corporation.
- Ginnie Mae is the nickname for GNMA-the Government National Mortgage Association.
A little family historyBoth Fannie and Freddie are what is commonly known as a GSE, or government-sponsored entity. That means that while federal law established Fannie in 1938 to provide home loans backed by the US government, it later sold Fannie in 1968 to investors, making it privately owned. Freddie, established in 1970, formed to create competition for Fannie in the mortgage market. Fannie and Freddie don't lend money. Instead, they undergird the home loan market by purchasing loans made by banks. They repackage the loans into securities to sell to investors. They make various guarantees to investors in the event that homeowners default on their mortgages. This market is called the secondary mortgage market, while primary means the loans to homeowners directly.
Both Freddie and Fannie trade in the public market with investors owning shares of each of the mortgages rather than shares of the company. In the market, this is called mortgage-backed securities (bonds). If a homeowner defaults on their mortgage, it affects the value of those securities.
Cousin Ginnie, formed in 1968, is a government agency, but performs similar functions to the siblings, except only with government-insured mortgages, like FHA and VA loans—those backed by the Federal Housing Administration. While she does not supply initial funding, she does insure the loans. So, if a borrower with an FHA loan defaults, both the Federal Housing Agency and Ginnie Mae continue to pay out monies due to the investors that bought Ginnie Mae-backed securities.
During the subprime lending crisis in 2008, both Freddie and Fannie lost tremendous value. People that invested in Freddie or Fannie bonds lost tons of money. At that time, in an effort to stabilize the housing industry, the federal government took over as conservator of both Freddie and Fannie, providing money to bail out much of the debt and pay investors. Conservancy means that the government controls the operations of both entities, although it does not own them.
Why does it matter?
Mostly, what happened to Freddie, Fannie and Ginnie matters more to investors than to borrowers. But the healthier Freddie and Fannie are, the greater the variety of loan types available to borrowers. The less Ginnie has to pay out to cover defaulted mortgages, the more money available to loan to first-time borrowers.
If you’re wondering which loan-type is best for you, contact a qualified mortgage broker to discuss your options.