Refinance Home Mortgage Guide

You’ve probably been hearing about the credit crisis in the mortgage industry recently and a number of people have been asking me what’s really happening. While it’s true the meltdown of the sub-prime or bad credit mortgage industry is affecting conventional mortgage lenders, the impact is not as bad as the gloom and doom you’re hearing in the news.

Who is the credit crisis affecting?

Homeowners that purchased their homes with loans not appropriate for their needs or financial situation and those with bad credit are feeling pinched by the crisis. This includes homeowners that purchased their homes with risky interest-only and option Adjustable Rate Mortgages (ARM) that are scheduled soon to reset. Many of these homeowners used these risky loans because they have low credit scores or are unable to sufficiently document their income and assets for a conventional mortgage loan. Homeowners with credit scores that are lower than 620 in need of jumbo or stated income loans will find getting approved very difficult if not impossible in the current climate.

Who is the crisis not affecting?

Homeowners with good credit in need of conforming mortgage loans (loans less than the $417,000 limit set by Fannie Mae) are not going to have any trouble refinancing their mortgage loans. The Federal Reserve recently lowered short term interest rates because of the crisis and mortgage rates are still very low. If you are in need of a stated income mortgage loans these loans are gradually becoming available; however, you will need to meet the credit/asset guidelines in order to qualify.

Mortgage brokers and lenders are feeling the pinch and should be eager to make deals; you will need to be careful to avoid junk fees and the unnecessary markup of your mortgage interest rate known as Yield Spread Premium.

Beware Junk Fees and Retail Markup

There are a number of junk fees listed on your Good Faith Estimate and HUD-1 statement you need to avoid when refinancing. Anything you find on these documents that resembles an application fee, lock fee, processing fee, or a courier fee is a garbage fee you should simply refuse to pay. The interest rate you are quoted when applying for a mortgage is typically a retail mortgage rate that includes your mortgage broker’s markup. This markup of your mortgage interest rate serves no purpose other than to give your mortgage broker a commission. Because you’re already paying an origination fee for your mortgage broker’s services this markup often doubles or triples your broker’s commission.

When questioning mortgage brokers about this markup known as Yield Spread Premium many brokers become defensive even angry. Your mortgage broker might tell you not to worry about this fee because it’s coming from the lender’s pocket; however, the reason the lender pays this fee is because you’re agreeing to pay a higher mortgage rate than you need to. You can learn more about avoiding Yield Spread Premium and other junk fees when refinancing your mortgage by registering for this free mortgage toolkit.

Step One: Do Your Homework

Before you consider a new mortgage it is important that you understand how mortgage loans work and which type of loan is right for you. You’ll need to choose a loan based on the type of mortgage interest rate and term length. You have two basic mortgage rates to choose from: fixed or adjustable. Term length is the amount of time you have to repay the loan and along with your mortgage rate determines how much your payment will be. There are other factors you need to learn about including Yield Spread Premium before shopping for a lender; you can learn more about Yield Spread Premium with my free mortgage tutorial.

Step Two: Check Your Credit

Check your credit reports for mistakes and negative information prior to shopping for a mortgage. You don’t have to pay for a credit reports or score to do this; credit agencies are required by law to provide you with one free copy of your credit reports every year. It’s not necessary to pay for a credit score when applying for a mortgage because you really don’t need to know it and your lender can give you the score when you submit your application.

You can request your free credit reports by visiting the website www.annualcreditreport.com and printing out a copy from Equifax, Experian, and Trans Union. Once you have your credit reports carefully review these records for errors. If you find mistakes you’ll need to dispute the error with each individual credit agency. If you have negative information such as judgments or write-offs you’ll need to try and settle with the creditor listed on your report to have this information removed.

Step Three: Find The Right Loan Originator

Your loan originator is the person arranging your mortgage. This person could be a loan officer at your bank, your mortgage broker, a representative from an Internet mortgage site, or someone at your local mortgage company. Never consider taking out a mortgage from your bank or credit union; banks are exempt from the Real Estate Settlement Procedures Act and are not required to disclose their profit margin or markup on your loan.

Step Four: Choose the Right Mortgage Offer

The right mortgage offer is the one that meets your financial needs without costing too much. If you found an upfront mortgage broker that will not charge Yield Spread Premium you should be paying an origination fee of one percent for the broker’s services. You can keep your broker honest by carefully reviewing the HUD-1 statement at least 24 hours prior to closing. If Yield Spread Premium is included in your mortgage it will be disclosed on lines 810-811 of the HUD statement.

Step Five: Closing and Review Your Contract

After you close you’ll need to review your loan contract and make sure the loan you got is the one you were promised. You have three business days after closing to change your mind before your loan is funded on the fourth business day. This period is your three day rescission which should be explained to you by your broker. During this rescission period you can change your mind for any reason. You can learn more about your mortgage refinancing options, including expensive pitfalls to avoid with my free video toolkit.