Financing

Credit
Loan Process
Equity
Re-financing
Articles

Buyers spend 75% of their time thinking about getting a property at a good price. The remaining 25% of their time they spend thinking about getting a "great rate" on their loan though they don't really know what a great rate. Rate shopping is easy in theory, harder in practice.

Credit

Credit scoring a good thing that generally works--people with good scores have generally earned them and people with bad scores have generally earned those as well. Anyone who says "I don't deserve my low score" is usually either lying or foolish. The one big exception to this is mistakes made by credit bureaus when entering data. For example, Tom Jones of Seattle has great credit while Tom Jones of Tacoma who has poor credit and the one with the good credit may be harmed due to confusion with the one with the bad credit. Such confusion can almost always be resolved quickly though not as always a quickly as you'd think (credit bureaus are bureaucratic and not every dispute is legitimate). So, excepting credit bureaus mistakes and internal screw-ups, credit scoring works.

Loan Process

Home loans are made on the basis of four main criteria:

• Income
• Credit Score
• Debt
• Cash

Income is monthly gross household income (yes gross income not net income where gross means before taxes and any other deductions). Household income is the total income that is earned by all borrowers meaning that if a husband and wife are getting a loan together then both his and her income will be included.

Credit score is the middle score of the three bureau report. So if one score is 720, another is 715 and the third is 710 then the 715 score will be used. If there are two borrowers (i.e., husband and wife) then the lower of the two middle scores is used.

Debt is all monthly debt which would include the monthly amounts of the following:

• principal-and-interest for the new loan
• property taxes
• hazard insurace
• auto loans
• student loans
• revolving debt (credit cards)
• installment loans

Adding all of these payments up will lead to a figure for total monthly debt and this number is used to establish a debt-to-income ratio. So, if a household makes $8,000 per month and debt is $3,200 per month then the DTI (debt-to-income ratio) would be 40%. A DTI of 40% or less is preferred because it makes it more likely that borrowers can service that debt. And remember that these are figured on gross, not net, amounts. The monthly debt should not exceed 60% of actual take-home pay after everything has been deducted because food, gas, utilities have to be paid out of the money remaining.

Lastly, cash refers to the amounts in a easily-accessed savings & checking accounts but it also refers to the amounts in retirement accounts. Lenders like to see at least 3 months of reserves because if there is a problem (say a job loss) then the borrower will have sufficient time to make pay the mortgage while looking for another position.

Articles

Loan data proves baffling to many, FTC says
Los Angles Times, June 14th 2007

Executive Summary of FTC report; full-report titled Improving Consumer Mortgage Disclosures (282 pages) referred to in the LA Times article;

Alex Pollack and The One-Page Mortgage Disclosure
Sample One-Page Disclosure (with two pages of explanation)

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