Q & A with Scott Baker, Mortgage Lending Officer at Duke University Federal Credit Union
Is now a good time to refinance? To buy a first home?
Even given the situation in the housing market, for many now is still a good time to refinance. This will depend on the individual, their credit scores, the amount of equity, credit history and loan-to-value.
In regards to purchasing a first home, now is an awesome time. Sellers are anxious to sell and with the condition of the market, they will settle on a price lower than they would have a year or two ago. Don’t be afraid to negotiate. If you approach the process of home buying as a game, you will see that the stronger player wins every time. I would also urge any potential home buyer from becoming emotionally attached. Part of the job of realtors is try to get you to fall in love with a house. What if things do not work out on the house that you are in love with? Then it may take longer to find the next one. If you can save the attachment until you have the keys in your hand, you will be much happier.
Is it harder to get a mortgage loan due to the credit crisis?
There have been a number of changes in mortgage lending. These changes have affected the way that we determine mortgage rates. I would not say that it is harder to get a mortgage but you may have a few more hoops to jump through.
Is it best to be pre-approved for a mortgage before you start looking?
I believe that it is imperative that you get pre-qualified prior to beginning the house hunting process. There is a difference between being pre-approved and pre-qualified. Being pre-approved means that a loan application is prepared, credit reports are pulled and the loan is sent thru an automated underwriting process. This is done typically on a property that does not yet exist. I prefer the pre-qualification process.
First, this will give you a really good idea as to the price range that you should be looking. Secondly, you will get an idea as to your monthly payment. This will be beneficial in preparing your budget. Most importantly, you want to limit the number of people inquiring into your credit.
Next, you need to be careful during this process because if you provide to someone your date of birth and social security number, rest assured that they are going to pull your credit report(s). This is called an inquiry. This inquiry is going to drop your credit score anywhere from 2-14 points. This one inquiry will take 2 years to fall off of your credit report.
What I recommend and how I pre-qualify everyone is that I have them go to www.annualcreditreport.com. By selecting the state in which you live, clicking on request report and providing some basic info about yourself, you will be able to access your credit report for free and your credit score for $7.95. The credit report that I prefer is Equifax. Please be aware that this site is not from a 3rd party vendor like www.freecreditreport.com . This is a site that the bureaus provide the consumer their free report from all 3 bureaus once every 12 months. Too, by getting the Equifax report and score from annualcreditreport.com, you are getting the exact same report and score as if I pulled your credit. I also advise that prior to printing your report that you select the option of blocking your date of birth and social security number from being printed.
How much should you put down on a home?
Typically, the minimum down payment will depend on the type of loan that you are looking to do. If it is an FHA, the minimum down is 3.5% and if it is a FNMA loan, the minimum is 5%.
Everyone is pretty much aware that the days of 100% financing are no longer available. At Duke Credit Union we still offer 100% financing. We have been offering 100% financing, Home Express, since 2002, provided they are qualified borrowers.
On this product, we are the actual investor and lender. The way that we do it is to provide a 1st and 2nd mortgage. The first is for 80% of the loan-to-value and the 2nd is for 20% of the loan-to-value. The first mortgage is a 5/1 adjustable rate mortgage (ARM). This is amortized over 30 years with principle and interest. It is not an Interest-Only type of ARM, nor is it a Sub-Prime mortgage. The 2nd mortgage is a 15 year fixed rate mortgage. We offer this for purchases, refinances and 2nd homes. We even pay the closing costs on the 2nd mortgage portion for you. The maximum purchase price for this product is $275,000.00 and is subject to credit approval.
What is PMI? What are discount points?
PMI stands for Private Mortgage Insurance. This is an insurance policy for the lender protecting them against the mortgage going to foreclosure. The amount that you pay generally depends on the amount of your down payment, loan amount and your credit score. To avoid this and you only want one mortgage, you will need to put down 20%. If you are unable, you will want to keep track of your principle and your home’s appreciation. My advice would be wait until you are certain that you have 22% equity before inquiring into the removal.
Discount points are where you typically see that the borrower is ‘buying down’ the rate. That is to say that they wanted a lower rate, they had extra cash on hand and they wanted a rate that was below the going rate. They could pay extra at the time of closing in order to get the lower rate. Each point is equal to 1% of the loan amount. One thing that I would suggest is to weigh the difference and see where you break even from a cost perspective before handing over the extra money.
Can you briefly describe the different types of loans (fixed, adjustable, etc.) and how to you determine what is best for you?
There are several different types of mortgages available. The most common is the fixed rate. This means that the rate is fixed for as long as you own the home unless you refinance. The terms for this type can be anywhere from 30 down to 10 years.
Another type is the ARM, which is an acronym for Adjustable Rate Mortgage. ARM’s are a fixed rate for a specified period of time. This is generally either 3, 5, 7 or 10 years.
What happens is that the rate is fixed for the amount of years and then the rate can adjust yearly, on a conventional loan after the initial period. With a FNMA type of ARM the rate can only adjust as much as 2% either up or down and there is usually a lifetime cap of 6%.
Depending on the current market conditions you are sometimes able to get ARM’s with a lower rate than for a 30 year fixed. The question to ask yourself before getting this type of loan is, how long do I intend on living in the home. Typical homeower’s today are in their house an average of 3 - 7 years. If that is the case, then it may be worth investigating further.
Interest Only mortgages are not available at DUFCU. I try to keep people away from this product. This type of mortgage provides the borrower an opportunity to own a home and to pay the interest only for a specified period of time. This type of loan means that you are not required to pay anything towards the principle during the initial period of 3-10 years. However, if you only pay the interest and you put nothing towards the principle, you are going to have a tough time trying to refinance when that initial period ends because the only equity that you are going to have is from appreciation and that will not be enough unless you put close to 20% down. Appreciation in this area can be anywhere up to about 4%.