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Be Wary Of "Sounds Too Good To Be True" Home Financing Ads! Plus: Who Really Makes The Lending Rules For Mortgage Companies? And: A Quick History Lesson On The FHA & VA......And How Being "Clueless" Could Cost You A Bundle!
April 8, 2004
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Dear Ben: I see so many ads claiming to have very, very low rates available on home financing. How can I find out if these are legitimate offers and what information can/should I get about a company before pursuing financing?
Pat C., via e-mail
Dear Pat: You’ve got to be cautious! Many ads are carefully worded to entice prospective home buyers to respond. They’ll either use either rock-bottom adjustable rate mortgage (ARMs) products as a big come-on, or conditions like "perfect credit required" as their out once you realize that you don’t qualify...so beware! In addition to being aware of these techniques, the #1 question you should ask has gotta be: "Are you a broker?" Brokers are middlemen who will end up making your loan more expensive; they’re brokering the loan to the actual mortgage company, who then underwrites and (eventually) funds it.
By the way: Most home borrowers aren’t clear on who’s making the rules when they’re under the borrowing microscope for a home loan. Contrary to popular belief, it’s not the lender (the mortgage company) making the rules, but their "investors."
Investors come in different forms: They can be government sponsored enterprises (also known as GSEs) like Fannie Mae or Freddie Mac, or federally-insured loans from the Federal Housing Administration (FHA) or the Department of Veteran Affairs (VA), or a private investing consortium. Mortgage companies "bundle" loans and ultimately "sell" them (in bundles known as "pools") to investors. Since the investors are the ones ultimately buying these bundles of loans, they’re the ones who set the actual underwriting criteria...and (typically) whatever products a mortgage company sells are based on these investor guidelines.
I’m sure you’ve heard the terms "FHA" or "VA" thrown around when the subject of mortgage financing comes up, but do you actually know what they mean and where they came from? The Federal Housing Administration (FHA) is a wholly-owned government corporation, established under the National Housing Act of 1934 to improve housing standards and conditions. It’s goal was to provide an adequate home financing system (liquidity) by insuring mortgages to stabilizing the mortgage market. The Department of Veteran Affairs (VA) was formed in 1930 to provide benefits for Veterans and their dependents, with the "VA home loan" being one of their most recognized benefits.
VA loans are a real blessing for the estimated 29 million eligible veterans and service personnel...especially if they’re "credit score challenged." For those with bad credit who are showing signs of an improving credit history over the last 12 months, VA borrowers can frequently secure the same low interest rates as buyers with A-credit histories...and with no money down (up to $240,000)! Another plus? One hundred percent financed VA loans aren’t required to carry expensive (and non-deductible) Private Mortgage Insurance (also known as PMI), and VA loans are often assumable. Considering the lousy pay and assorted uncertainties that our nation’s military personnel face, it’s nice to see them have the shot at building some long-term net worth through home ownership.
Dose of Dover For The Week, Part I: Thanks to the wide-range of home financing (or re-financing) products out there and record-low interest rates, I suspect it’s going to be a hot spring and summer ahead for home buyers and the companies who finance them. I hope you’ll take advantage of my free home buyer’s guide; it's not only great information for first time, buyers but for those sniffing around the re-finance market too: www.bendover.com/home.asp.
Dose of Dover For The Week, Part II: Qualifying for home financing is one thing, but being clueless about the insurance claims history of a property could lead to big nightmares if you’re not careful. There insurance industry relies upon a little-known database known as CLUE: Comprehensive Loss Underwriting Exchange, tracking hundreds of millions of auto and homeowner’s insurance claims. Insurance underwriters scrutinize the backgrounds of properties, and multiple claims at a particular address of any type can present a financing roadblock: Water damage, fire and a frequent North Texas property danger–hail–can throw up red flags, as can excessive losses in a neighborhood. Find out more about a topic that affects all of us sooner or later (as well as how to get a copy of these CLUE reports) on my website: www.bendover.com/clueless.asp.
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