Difference Between Underwriting Fee and Processing Fee

Reader Question: Is there a difference between a processing fee and an underwriting fee?

Yes, there's a difference between them. While they are both common fees associated with mortgage loans, they are assigned for two different things. Here's the difference:

• Underwriting Fee - This is a fee that covers the underwriting process in particular. Some lenders have in-house underwriters, while others will outsource it. The underwriter is the person who verifies the information you provide on your mortgage application, among other things.
• Processing Fee - This is a more general fee that relates to other actions performed by the loan officer(s).

And just when you thought you were out of the woods, there are more fees associated with mortgage loans. Basically, every time somebody lifts a finger to do anything, there's a unique charge associated with it. Sorry mortgage lenders, but that's the truth!

In most cases, you'll also pay a free just for the "privilege" of applying for the mortgage -- aptly referred to as the loan application fee. And then there are additional fees for origination, title searches, document preparation, property appraisal, etc.

Last but not least, there is the always-controversial "suck it up" fee, which lenders will impose on you just because they can. Okay, so I made this last one up. But all the other mortgage fees listed are legitimate. More importantly, many of them are negotiable.

You can learn more about this subject from this article on common closing costs. Hope that helps!

Can I Cancel My Remortgage / Refinance Loan Application?

Reader Question: Can I cancel a remortgage / refinance application at any time?

You will need to review your application to see what the stipulations are for canceling. Every lender has different policies, so there's no way I can answer the question for you -- not while being ethical, at least.

Most mortgage applications have a section that specifically talks about cancellation policies. It should explain the steps you must go through to cancel (usually a written letter will suffice), and it should list any fees that are involved. There's almost always some kind of fee association with a cancellation.

Keep in mind also that if you cancel the application with this particular lender, and then try to reapply with the same lender down the road, you might find that they are unwilling to work with you again. Of course, this concern is secondary to the fact you should do whatever is in your financial best interest ... but it's worth mentioning at least.

Related article:
Canceling Refinance Application for Lower Rate

Hope that helps. Good luck.

Selling a Home for Less Than I Owe - How Will It Affect Me?

Reader Question: If we sell a house for less than it is worth and make arrangements with our mortgage company to pay the difference, how will that affect us getting a new mortgage?

It sounds like you're talking about a short sale process, in which the lender agrees to let you sell the home for less than what you owe. For a long time, this technique was primarily used as a way to avoid foreclosure when homeowners fall behind on their mortgage payments.

But these days, more and more homeowners are seeking this kind of arrangement with their lenders. This is because property values have dropped so drastically in many cities. As a result, many homeowners are now discovering that they owe more on their mortgage loan than the home is actually worth (in the current market).

The intermediary factor we haven't talked about yet is your credit score. I believe you mean to ask, "How will this kind of transaction affect my credit score?"

As long as you don't default on the loan (by ignoring your payments altogether), I can't see why this would affect your credit score in any significant way. A full foreclosure, on the other hand, can seriously harm your credit score. But based on everything I've read or heard, the kind of arrangement you're talking about should not have any major credit implications ... as long as you pay off what you owe in some way, shape or form.

When you apply for your next mortgage loan, the lender is going to look at the usual factors to qualify you. This includes your credit score, your debt-to-income ratio, and your overall income level. If you measure up in all of these areas, and you have a sufficient down payment, you have a good chance of being approved. Lenders know that the economic crisis put a lot of people into a bind. So if you meet their basic lending criteria, and they feel you are a reasonable risk, they won't dig too much into the past.

Can I Buy a Home Instead of Renting It?

Reader Question: I lost my home due to certain circumstances. And now am going to rent a home from someone that is selling it. Is it possible for me to buy home from them, instead of renting?

Sure, it's possible. I know quite a few people who are struggling to sell their homes right now, due to the economy. It's especially common with people who have to move for a job transfer or some other reason. Many of these folks end up renting their houses out until they are able to sell them, to lessen the blow of paying two mortgages.

But the next logical question is, do you have the money to buy the home instead of renting it? If not, you'll need to apply for a mortgage loan. This leads to another question. Can you get qualified for a mortgage loan in order to buy the home?

I don't know why you lost your previous home (and I'm sorry you did). But if it was due to financial reasons such as foreclosure, then you may have trouble qualifying for a mortgage to buy the home that's for rent.

I know that doesn't really answer your question, but in truth there's no way I can answer it. The real answer lies with you, the seller and a mortgage lender.

With all of that being said, it certainly doesn't hurt to shop around for a mortgage quote, or to schedule an appointment with a lender to get pre-qualified for a loan. In fact, that's the next logical step. You have to know where you stand, in terms of mortgage qualification, before you can move forward.

Related article:
Renting Versus Buying a Home

Hope that helps. Good luck.

How Long Does the Settlement Process Take?

Reader Question: How long does the settlement process take?

It varies based on many factors. But on average, the real estate closing / settlement process can take anywhere from two to four hours. If everything goes well (meaning there are no disputed issues, title issues, or accounting discrepancies), then the settlement process is pretty straightforward.

Just don't be in such a hurry to get it done that you gloss over the paperwork. Yes, you'll have to sign your name over and over, until you get writer's cramp. But they are important documents you're signing.

Many of the first-time home buyers I talk to say they felt rushed during their closing / settlement process. Or they didn't want to read every little paragraph because they felt like they were holding people up. I probably annoyed the sellers and the escrow people when I bought my first home, because I examined every piece of paper during the settlement process. I asked a ton of questions too. I recommend you do the same thing.

Here's another tip I give home buyers, with regard to the settlement process. If you want to read through all of the paperwork (and you're a slow reader like me), ask to come in about 30 minutes early. This will give you some time to review the settlement papers before everyone else shows up. Then, when all parties are present, you can sign your life away with greater confidence. :-)

Related articles:

• The Real Estate Closing Explained
• What Happens During the Closing Process?

Hope that helps. Good luck.

Trying to Refinance to Fixed Rate - Property Appraised Low

Reader Question: I recently purchase a brand new home in April 2007 469.000 with a 20% down payment at an ARM rate, I recently tried to refinance for fixed rate, however the property appraised at $290.000. How is that?

Welcome to the recession. It sounds like your property values have dropped, as they have done in most parts of the country.

This is a problem for a lot of people who are trying to refinance their homes right now. They approach a lender to get a refi loan, the lender sends an appraiser out to get a current value of the property, and the homeowner is shocked to find how much their values have dropped.

Approximately 12 million Americans are upside down in their mortgage loans right now, meaning they owe more than the home is worth in the "new economy." In most cases, this puts refinancing out of reach. From the numbers you've provided, it sounds like you might be in the same boat. For what it's worth, I feel for you.

I recently posted a Q&A session on our refinancing blog about this very topic. A fellow wrote in asking how to refinance when upside down in a mortgage. That post might be worth reading as well. It doesn't offer much in the way of good news, I'm afraid. But it will help you understand what's happening in the U.S. housing market right now.

When Do You Pay the Down Payment Money on a Mortgage Loan?

Reader Question: When during the mortgage process do you pay the down payment money?

You typically pay it during the closing process (also referred to as "settlement"). This is the process in which ownership is transferred from the seller to the buyer.

Your mortgage lender should tell you how much you need to bring for the down payment and other closing costs. They'll give you an estimate up front, when you apply for the mortgage loan. And then, a day or two before closing day, they will send you what's known as a HUD-1 settlement statement. This document will tell you exact amount you need to bring to the closing to cover the down payment, the origination fee, the appraisal fee and other closing costs.

Here's the typical process that takes place from house hunting to closing:

1. The home buyers get pre-qualified for a mortgage loan. This is not a final approval, but it does give the buyers a general idea of how much they can borrow.
2. After house hunting, the buyers find a suitable property and make an offer on it.
3. If the offer is accepted, the buyers then go back to their mortgage lender for approval.
4. Next, the lender will have the home appraised by a professional appraiser. They want to determine if it's truly worth the amount the buyers have agreed to pay.
5. If the home meets appraisal, then the buyers can schedule their closing day (a date that agrees with them, as well as the sellers and the lender).
6. During the closing process, the buyers will pay their down payment to the lender, along with whatever closing costs they owe. Once you find out what the total amount is, you can go out and get a cashier's check for that amount.

That's how it works in a nutshell. I hope that helps you out. The best advice I can give you is to stay in close touch with your lender between the time you get approved for the loan and the final closing.

Earnest Money Deposit - Do I Lose the Deposit if I Back Out?

Reader Question: If I back out of buying a home, will I lose my deposit?

It depends on where you are in the process. If you have made an offer on the home, and the seller accepted the offer and took the home off the market ... then yes, you'll probably lose your earnest money deposit. That's usually what happens, at least.

But to find out for certain, you'll have to check your paperwork to see what is says. This kind of thing should be spelled out in your purchase agreement. There should be a paragraph or clause about the earnest money, what happens if the buyer defaults / backs out, etc. So start there.

The most important thing is not to buy a home you don't like. Maybe you thought the home was "the one" when you first saw it, but you've changed your mind for some reason. Hey, it happens. The worst thing you could do is say "Oh well, I guess I'll just buy it anyway." Sure, it can be hard to lose your earnest money deposit (if that turns out to be the case). But it's better than buying a house you don't want!

Here's a related article you might want to check out:

What Home Buyers Should Know About Earnest Money
You include earnest money with an offer on a house to show the seller that the you are serious about purchasing the house. But many buyers don't understand how this process works, how much money to put down, or what happens if they back out of the deal. This article gives a good overview of earnest money deposits.

Hope that helps. Good luck, and happy holidays.

Have to Transfer But Can't Sell the Home - What to Do

Reader Question: "My husband will be transferring to another state. With so many foreclosures in our area, it is impossible to sell our house. We'd have to give it away. We talked with our lender and they are not willing to do a quick sell, and one lender actually told us to walk. What are other options to foreclosing, when we can't afford to rent out our current home? What can we do and what would a lender think of our situation if we wanted to buy another house after a job transfer?"

Unfortunately, I don't know what advice to offer based on the information you've provided. You seem to have eliminated most options in the course of asking your question.

I'm assuming from your question that you are upside down in your mortgage right now, meaning you owe more than the home is worth. This is a common problem right now, with more than 12 million Americans in the same situation. You're right, it's tough spot to be in, and nothing I can say will change that.

There are some new mortgage modification programs available for people in tough spots, but these are typically offered through a homeowner's current lender. And it sounds like your lender is not offering you many options.

If your lender has said no to a short sale process, then I don't see any other way to sell the home. If you can't afford to make two mortgage payments, then you probably won't qualify for another mortgage loan in the state where you're moving.

Most real estate experts are telling people in this situation to stay put and hope the market improves, driving values back up. You might want to seek the help of a financial adviser who specializes in the real estate field. He or she may be able to provide more advice than I can.

Paying Off Debt Before Applying for Home Mortgage

Reader Question: How much time before applying for a home mortgage is it good to pay off debts on credit report?

I've received similar questions through our Credit Help Blog lately (it's another Q&A blog similar to this one). So it's probably best if I just post some links to those Q&A sessions. Here they are, in no particular order:

Paying Off Debt to Increase My Credit Score
This person asked a similar question to yours. He actually paid off most of his debt and was wondering how long it would take for his credit score to rise. Of course, I cannot answer that kind of question without a crystal ball, but I did my best to explain how the process works and what he might expect.

Will Paying Off My Bills Raise My Credit Score?
In this Q&A session, I explained the credit utilization ratio and how it relates to debt, FICO scores, mortgage qualification, etc. This one's probably worth a read too, because it addresses the same subject but from a different angle.

Debt-to-Income Ratio for Mortgage Qualification
You sound like you're familiar with the concept of DTI ratio already. If not, this article will explain how lenders will look at your your debt when considering you for a loan. Many home buyers don't realize that DTI ratio is just as important as credit scores when applying for a home loan.

With all of this being said, reducing debt is always a worthy pursuit. And in most cases, sooner is better than later. Not only will it make it easier to get approved for a mortgage loan, but it will help you qualify for a better interest rate as well (by improving your credit score). No better time like the present!

I hope that helps. Good luck, and happy holidays.

~Brandon

First Step to Buying a Home - Where Do I Start?

Reader Question: What is the first thing I need to do to buy a home?

We have an article on the main website that explains the ten basic steps to buying a home. That's probably worth reading, since it's relevant to your question.

As the first step in this process, I recommend a thorough review of your financial and credit situation, to find out where you stand in terms of mortgage qualification. That way, you'll know what you need to work on before you start house shopping and applying for mortgage loans.

Get copies of your credit reports from all three reporting agencies and read through them with an eye out for errors. If you find any mistakes within your reports, dispute them through the company that produced the error. It's good to make this one of the first steps to buying a home because the correction process can take a while. It's important to make sure your credit reports are accurate, because errors can hurt your credit score (which also hurts your chances of getting approved for a loan).

Checking your credit score is another one of the first steps to buying a home. When you apply for a home loan, the mortgage lender will review all aspects of your financial background -- including your credit score. If your score is low, you could have trouble getting approved for the loan. This is why I recommend starting with a good review of your financial picture. If you find out that your credit score is below average, you can focus on repairing the score before you apply for a mortgage. So it's wise to make this one of the first things you do before buying a home.

I also recommend that you determine your home buying budget. You can use a mortgage calculator to determine what the monthly payments might be for a certain sale price / range. For example, you can start with a $200,000 loan at 6% interest over 30 years, and the mortgage calculator will tell you what your monthly payment will look like. You can then determine if this is affordable for you, based on how much you make each month (gross income) and how much you spend on other things (car payment, groceries, savings, etc.). Setting a budget is one of the first steps you should take when buying a home because it prevents you from overspending on your mortgage loan.

These are the things I recommend starting with when buying a house for the first time. If you'd like to see a complete overview of the process, check out our 101 Steps to Home Buying article. It's one of the most popular tutorials on the website, because it explains each of the steps with links to related information.

Improving My Credit Score of 527 by Summer of 2009

Reader Question: "Right now my credit score is 527 which has fallen because of late payments due to unexpected life changes. I have been working with a mortgage consultant who said if I continue to bring my payments back to good standing it will help me qualify for a good 'A' paper loan. I plan on purchasing a home after May 2009. Do you believe that is feasible? And how much can I bring my credit score up to by summer 2009?"

For readers who are not familiar with the terminology, an A-paper loan is one offered to the best-qualified applicants (high credit score, good debt-to-income ratio, etc.). This type of loan typically gets the best interest rate the lender has to offer. In other words, it's kind of loan you want. Like getting an 'A' on your report card.

The qualification criteria for getting an A-paper loan is not set in stone and varies from one lender to the next. With that being said, the criteria are stricter today than they were a couple of years ago. This is mainly a result of the housing crisis. From what I've been reading lately, most lenders are reserving their best interest rate (their A-paper loans) for people with FICO credit scores in the 700+ range.

That brings us to your primary question. How much can you improve your score by summer of 2009? This depends on what all you do between now and then. But it's certainly within the realm of possibility. I've seen people increase their credit scores significantly in fairly short period of time -- I'm talking three or four months.

Here are some related Q&A sessions from our Credit Help Blog you might want to read:

• How long does it take to improve a credit score?
• How long does bad credit stay on your report?

Hope that helps. Good luck reaching your goal.

~Brandon

How Long Between the Offer and the Closing Date?

Reader Question: How long until closing after the offer is made on the home?

That's up to the buyer and the seller. Because when you make an offer on a home, the closing date is one of the things you would write into the contract.

Typically, there will be a window of 30 - 45 days between offer acceptance and the final closing date. But it's up to the parties involved. I've seen scenarios where there was only a two-week escrow period between the offer and the closing, and other times when a 60-day escrow was used. It's something the buyer and seller must agree on before the deal can proceed.

As a buyer, you would need to allow enough time for the appraisal, home inspections, etc. In fact, one could argue that the home buyer is typically busier than the seller at this stage of the game. Both parties are preparing for a move, but the buyers must also get their final approval from the lender (with all of the paperwork that involves), go through the appraisal process to ensure they can get their loan, arrange for home inspections, etc.

This is why you sometimes see a home go under contract (meaning an offer has been accepted) but then come back on the market. In most cases, this means that the buyers could not get their financing approved.

Here are some related articles on this subject you may find helpful:

• How do you make an offer on a house?
• What happens after the offer is made?

I hope that helps you out. Happy holidays.

Am I Eligible for the First-Time Home Buyer Tax Credit?

Reader Question: My wife and I bought a home in November of 2007. Are we eligible for the first-time home buyers credit? We meet all the other requirements besides the date requirement.

We are not involved with the tax credit program for first-time buyers, so there's no way I can say whether or not you're eligible. I would guess you're not eligible, because the guidelines state that the credit is retroactive for purchases made after April of 2008. Since you bought your home several months before that, I'm not sure that you'll be eligible for the first-time home buyer tax credit.

Of course, it couldn't hurt to apply for it, even if you don't get very far. The time window is not the only requirement though. There are also income criteria for the tax credit. People with an annual gross income under $75,000 would qualify for the full credit amount (if they meet all other requirements). Individual home buyers who make more than 95K a year, or couples who make more than 170K on a jointly filed tax return, would not be eligible for the program.

It's also worth nothing that it's not an actual "credit," in the true sense of the word. It's more like a no-interest loan. Most people don't realize you have to pay the full amount back, but you do. Anyone who claims this credit on their taxes must pay it back in annual installments, starting the second year after you get the credit.

You can get the full details of this program in this section of the IRS website.

Using Fiance's Income Without His Name on the Mortgage

Reader Question: Can I use my fiance's income and not have his name on the mortgage?

That depends on what you mean by using your fiance's income. If you want to use it to help you qualify for the mortgage, then he will be one of the borrowers on the loan. Thus, his name will be on the mortgage. If you use his income as a joint asset, and the lender factors that into their qualification process, then his name will be on the mortgage in some way.

If you mean you want to put the mortgage in your name only, but use part of your fiance's income to help make the mortgage payment each month, then you can certainly do that. The lender doesn't really care where the money comes from each month, as long as the payments are made on time.

This question often comes up when one spouse has good credit and the other has bad (but both people have income). Buyers in this situation want to report both incomes when applying for the mortgage loan, but they don't want the spouse with bad credit to "blow the deal." I don't know if this is your situation or not, but it's fairly common. We answered a question on this topic back in November, over on the Credit Help Blog. So it might be worth a read, if you're in this kind of situation.

Here's the other Q&A session:
Getting a mortgage when spouse has bad credit

Hope that helps you out some. Happy holidays.

How Long Does Mortgage Pre-Qualification Take?

Reader Question: How long does it take to get pre-qualified for a mortgage loan?

The actual process of pre-qualification is usually pretty quick, because it's just a basic review of your finances. Of course, it depends on many things. How big is the bank, and how much of a backlog do they currently have? Do you have all of your paperwork squared away? Are there issues in your background that will require further clarification from the lender?

All of these questions affect how long it takes to get pre-qualified for a mortgage loan. I once showed up for this process and was done with it in about two hours. I've also heard of people who had to wait several days for the lender to get back to them.

Keep in mind that the pre-qualification process is different from the pre-approval. The former is a quick review of your finances to give you an estimated loan amount you might qualify for. The latter (pre-approval) is a more in-depth review of your finances, and a firmer commitment from the bank.

With all of that being said, you can expedite the pre-qual process by asking what they need from you in advance, and rounding up all of that information prior to your meeting (or prior to applying online if you go the Internet route). In most cases, this includes your W-2 statements for the last two years, proof of income such as pay stubs, and any other financial / asset documentation you have.

Here's an article on the main website you might want to check out:
Pre-qualification and pre-approval letters

And here's a blog post that walks you through the overall process of mortgage approval. It's worth a read too.

Hope that helps. Good luck, and happy holidays.

Interest Rate on Rural Development Loan

Reader Question: Is a rural development loan at a higher interest rate than a regular loan?

I have no direct experience with this type of loan, but I have researched it on numerous occasions for books and articles. So everything I'm about to tell you is based on publicly available information, as opposed to my own personal experiences.

For the benefit of other readers, let me start with a quick definition. A rural development loan is issued by the USDA (the same government organization that sets food regulations, among other things). It is typically for reserved for home buyers in rural areas, and it also has certain income restrictions on it.

The rural development loan is one of the only options for 100% financing these days. In other words, a qualified borrower can use this program to finance the entire purchase price of the home, which eliminates the need for a down payment. That's the whole point of this housing program, to help low-income families in rural areas purchase a home.

When you apply for a rural development loan (and if you get approved), the government will base the amount on your income. They will look at how much you make each year, and then factor about 26% of that income toward the mortgage payment amount.

The interest rate on the USDA rural development loan is based on the rate that the government pays for the money it borrows. Sometimes the interest rate is subsidized (partially paid for) in order to make it even more affordable. So while there are many variables that prevent me from offering a "yes or no" response to your question, I can say that it's possible to get a lower rate on a rural development loan than one made through a private lender.

The main thing is that this program makes home ownership available to certain people who could not otherwise afford it. It's also worth nothing that you would not have to pay mortgage insurance with this type of financing, and that's another big benefit for the people who can qualify for a rural loan.

This program is limited to people in certain geographic areas and with specific income levels. You can find a list of eligible areas on the USDA website.

Getting a Mortgage Loan When Self-Employed

Reader Question: I have a zero credit score. Everything I own is paid for, including my mobile home. I was approved for a mortgage loan in June 2008, but a week later I lost my job. I am now self-employed. The lenders I have spoken with now say I have to be self-employed for two years before they can look at me for a mortgage loan. Is there any way I can get a mortgage without waiting two years?

What you are hearing from some lenders (in regards to self-employed borrowers trying to get mortgage loans) may in fact be true. One of the top two criteria lenders use when reviewing a mortgage application are credit and income. Since you do not have a stellar credit score in your favor, chances are that any lender willing to seriously consider your application will be looking for solid proof of income. This is where being newly self-employed becomes a factor.

In the past, mortgage lenders were willing to make loans based on stated income -- if a borrower had stellar credit and was willing to make a large down payment and pay a higher interest rate. But during our most recent housing boom, these loans were somewhat misused and commonly became known as "liar's loans." They got this nickname because borrowers were not required to prove their income and often inflated it. Most financial institutions have eliminated these types of loans entirely, and Fannie Mae and Freddie Mac have also discontinued their stated-income mortgage loan program for self-employed borrowers.

Because you do not have a W2 from an employer to prove your income (being self-employed and all), the lender will rely solely on the past two years tax returns for the business. And this brings us up to where you are stuck. Your best bet would be to work on raising your credit score so you can work your way from zero up to a really good score. This will help you immensely when the current credit freeze passes and lenders start to loosen up their mortgage lending criteria.

You can also start a fund to save money for the down payment when you are finally approved for a mortgage loan, because you may be required to put down 20%-40% due to your self-employed status.

Hope that helps you out some. Good luck, and happy holidays!