Remodeling and Construction Financing
The banks often offer and change their Home Equity Loan Programs.
Here is some helpful information in dealing with the variables of financing your Remodeling Project for consideration. This is not intended to give or replace legal advice from your attorney or CPA.
How do I get the best loan or mortgage rate?
In order to get the best loan or mortgage for your particular situation, the most important thing you can do is to educate yourself about what options are available. Knowledge puts one in better control and gives enough information to know what questions to ask.
Obtain a copy of your personal credit report and credit score before meeting with lenders. There will frequently be issues on your credit report that you will want to get corrected. Lenders will often pull your credit report/score before they quote you a rate.
When you talk to or meet with a lender, ask for a “good faith estimate.” This is a full disclosure of the estimated charges for a loan in writing. They may not be willing to provide one without pulling your credit, but it never hurts to ask and you should definitely get this before signing any loan docs.
Should I go to a Bank or a Mortgage Broker?
When shopping for a loan there can be a substantial difference between the loan that is available to you from a bank loan officer versus an independent mortgage broker and it is helpful to understand the key differences. The following descriptions provide some of the most common distinctions.
Bank Loan Officers
The bank loan officer works at a bank, credit union, or other financial institution that offers home loans directly to the consumer. The loan officer is employed by the institution that is offering the loan or mortgage. They will often have a variety of loan products available and all of their loans originate from within their own institution.
There are a number of benefits to working directly with a bank or credit union, as well as some potential drawbacks. In some cases consumers with very good credit scores will be offered better interest rates at a bank or credit union than are available through independent mortgage brokers. This is partly because the financial institution can make more money if it doesn’t have to pay for the services of an outside mortgage broker. Also, if you have an existing banking relationship, then they may be able to use that as a positive factor in evaluating your loan.
On the other hand, for consumers with more challenging credit scenarios and/or more complex financial situations, there may be more options available through an independent mortgage broker.
A mortgage broker is a professional who in Oregon is licensed by the state’s division of Finance & Securities. They may work independently or be part of a larger brokerage company. The primary distinction between the mortgage broker and the bank loan officer is that the mortgage broker or their brokerage company are not funding the loan themselves. Just as with banks, there are pros and cons to working with a mortgage broker.
One of the primary benefits to working with a mortgage broker is that they will frequently have access to home loans and mortgages from hundreds of different financial institutions. This can be especially helpful when dealing with unusual financial situations, bad credit, or more exotic types of construction loans or land/lot loans.
Some potential drawbacks are they may have less control over the loan decision making process and are thus somewhat more at risk of being affected by changes in the financial markets. Even so, in most situations it is worthwhile to evaluate all of your options.
If you are going to be working with a mortgage broker, you may want to consider working with an “upfront mortgage broker.” These are brokers that are members of the Upfront Mortgage Brokers Association, which is a non-profit association whose members have committed to full-disclosure of the fees they are getting paid. The benefit is in some cases mortgage brokers will quote a loan product with a higher interest rate that includes something called a Yield Spread Premium (YSP) which may work out to be an additional commission fee that they receive and that you are paying for. Thus, if you do decide to work with a mortgage broker, and especially if you choose one broker to work with exclusively, then it is recommended that you ask for full disclosure of the fees that they are being paid, including YSP, to ensure that you understand the nature of the financial relationship you are establishing.
The factors which affect a loan’s interest rate are:
- Size of Down Payment
- Fixed Rate or Adjustable Rate Loan
- Points Paid
- Credit Scores
- Conforming or Non-Conforming (Jumbo) Loan
- Type of Real Estate Loan (Residential, Multifamily 1-4 Units, Commercial, Lot/Land, Construction, Condominium)
- Employee or Self-employed
- Owner Occupied or Investment Property
- Length of Employment
The down payment amount that is needed will vary greatly depending on the specifics of your loan. The loan factors listed above will influence the down payment requirement. Typically, loans with less than a 20% down payment will require PMI or Private Mortgage Insurance. This is an additional fee added to the monthly payment for your loan. However, there are alternatives to paying PMI, such as combo or piggyback loans, where you will get a second loan/mortgage. Ask your lender for more details on these options if you want to make only a small down payment.
What is the difference between a fixed rate and an adjustable rate mortgage?
Generally speaking, a fixed rate loan refers to a loan for which the interest rate is fixed for the entire life of the loan. The most common product of this type is a 30-year fixed rate mortgage, however, 10, 15, and even 40 year mortgages are now available. These are the most common and popular types of loans because the payment amount is not prone to changing.
Adjustable rate mortgages (ARM), on the other hand, are prone to having the interest rate change or “reset” at specified intervals. When this happens the payment amount will go up or down, generally based on a published financial index such as the 1-year US Treasury Bill. There are many different types of ARM loans, and the most common type is a hybrid ARM loan where the interest rate is fixed for an extended period of time, such as 1, 2, 3, 5, 7, or 10 years or more. The attraction is the initial mortgage payment is more affordable, but the primary risk for consumers purchasing with ARM loans is that interest rates will rise and then their payments will increase to an amount that they are no longer able to afford.
What are points?
Mortgage points are fees paid to the lender to lower your interest rate. They are expressed as a percentage of the total loan amount. 1 point = 1% of the total loan amount.
What is a conforming loan?
A conforming loan is a loan that meets the guidelines set by Fannie Mae or Freddie Mac. Every year, in January, the conforming loan limits are set based on the median cost of housing in a region. The limits for most counties in the Portland Metro area are currently $417,000 for a single family dwelling.
What is a Jumbo Loan?
A jumbo loan, also known as a non-conforming loan, is a loan for an amount greater than the conforming loan limit. Thus, for most of the Portland area that would be a loan greater than $417,000.
What is an FHA Loan?
An FHA Loan is a program provided by the Federal Housing Administration that can have lower down payment requirements and easier qualification guidelines than many conventional loan programs and is available for loans up to $418,750 for a single family dwelling. These loans are only offered through approved lending institutions and most large lenders are FHA approved.
What is the difference between a home loan and a mortgage?
It is a fairly common practice for people to use the two terms interchangeably, as I am doing in most of this FAQ. Technically, a “loan” in financial terms could be secured (ie home loan or car loan) or unsecured (ie credit cards), and a home loan would generally refer to a loan that is secured by residential real estate. A “mortgage” or “mortgage loan” is more specific and is exclusively used in reference to a loan that involves real estate, however, technically most loans in Oregon and many other states or done via a “deed of trust” which is a slightly different legal instrument than a traditional “mortgage.”
Many people are confused about how the system of credit reports and credit scoring works in the United States. This article attempts to answer many common questions about the credit scoring system with an emphasis on how credit scores relate to getting a home loan or mortgage.
What exactly is a credit score?
A credit score is a number that is designed to provide a numerical assessment of an individual’s creditworthiness, which represents the perceived likelihood that an individual will pay their debts in a timely manner. It is provided to financial institutions and other businesses by credit bureaus.
What is the best credit score?
The highest possible FICO score is purported to be 850 and the lowest score is 300.
What is a good credit score?
As with many things in life, it depends on whom you ask. According to Fair Isaac Corporation, the creators of the FICO scoring model, a score above 700 is good. However, for the purpose of getting a home loan each lender has different guidelines and you should consult with your bank or mortgage broker for more specific information.
What is a bad credit score?
As it relates to home loans, it has been reported that scores below the mid-600s will generally only qualify for subprime mortgages, however, again each lender has different guidelines and you should consult with your bank or mortgage broker for more specific information.
What is the average credit score?
According to Fair Isaac, the median credit score is 725, however, only about 75% of the eligible population (over 18) have credit scores so the data is incomplete.
Where can I get my credit score?
You can order your FICO credit score from myfico.com. Also, when you apply for a home loan many mortgage brokers will provide your score if you ask them.
Where can I get my free credit report?
You are entitled to get one free copy of your credit report per year from each of the 3 credit bureaus. Go to www.annualcreditreport.com to order your free report. Note that there are many other sites where you can buy your report, but this site is the official site created to comply with the Fair Credit Reporting Act.
How will my credit score affect my home loan or mortgage?
When you apply for a home loan or mortgage, the lender will request a copy of your credit report and the accompanying credit score from one of the credit bureaus. The higher your score is, the easier it will be for you to get a home loan. Your credit score will also affect the interest rate that the lender offers you, which influences how much your monthly payment is.
How do they calculate credit scores?
The credit scores are generated based on statistical model based that incorporates the information contained in your credit report. There are several different categories of information that are used, such as: Payment History, Amounts Owed, Length of Credit History, Types of Credit Used, and New Credit.
How do I improve my credit score?
There are many different ways to improve your credit score, however, it is important to understand that your credit score does not necessarily update immediately and that it may take time for any changes to be reported to the credit bureaus. The first step is to obtain a copy of your credit report to see what information is being reported about you. If there are any inaccuracies, then you will want to take the steps necessary to correct the information on your report. Some of the other things that you can to do improve you credit report are:
- Pay down your credit card debts
- Make sure you pay your bills on-time every month, especially credit cards and loans
- Request to have your credit limits increased
- Keep your oldest credit accounts open
- Don’t apply for new credit cards too often
What is a Credit Bureau?
They are the businesses that create, store, and sell the information in your credit files. In the United States, there are three major credit bureaus or credit reporting agencies: Experian, Equifax, and Trans Union.
Where does the information on my report come from?
The information contained in your credit report is primarily provided to the credit bureaus by the financial institutions that you have credit relationships with. For example, credit card, auto loans, personal loans, and home loans are the most common.