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Mortgage Loan & Refinance Blog - My Personal Experiences, Insights and help for you.

Monday, May 22, 2006

The Mortgage Loan Process

Hope everyone had a good weekend. Now we are going to discuss the basics of the mortgage loan process.

In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting an application and documentation related to his/her financial history to the underwriter. Many banks now offer "no-doc" or "low-doc" loans in which the borrower is required to submit only minimal financial information. These loans carry a slightly higher interest rate (perhaps 0.25% to 0.50% higher) and are available only to borrowers with excellent credit.

Sometimes, a third party is involved, such as a mortgage broker. This entity takes the borrower's information and reviews a number of lenders, selecting the ones that will best meet the needs of the consumer.

Loans are often sold on the open market to larger investors by the originating mortgage company. Many of the guidelines that they follow are suited to satisfy investors. Some companies, called correspondent lenders, sell all or most of their closed loans to these investors, accepting some risks for issuing them. They often offer niche loans at higher prices that the investor does not wish to originate.

If the underwriter is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called stipulations. The meeting of such conditions can be a daunting experience for the consumer, but it is crucial for the lending institution to ensure the information being submitted is accurate and meets specific guidelines. This is done to give the lender a reasonable guarantee that the borrower can and will repay the loan. If a third party is involved in the loan, it will help the borrower to clear such conditions.

The following documents are typically required for traditional underwriter review. Over the past several years, use of "automated underwriting" statistical models has reduced the amount of documentation required from many borrowers. Such automated underwriting engines include Freddie Mac's "Loan Prospector" and Fannie Mae's "Desktop Underwriter". For borrowers who have excellent credit and very acceptable debt positions, there may be virtually no documentation of income or assets required at all. Many of these documents are also not required for no-doc and low-doc loans.

* Credit Report
* 1003 — Uniform Residential Loan Application
* 1004 — Uniform Residential Appraisal Report
* 1005 — Verification Of Employment (VOE)
* 1006 — Verification Of Deposit (VOD)
* 1007 — Single Family Comparable Rent Schedule
* 1008 — Transmittal Summary
* Copy of deed of current home
* Federal income tax records for last two years
* Verification Of Mortgage (VOM) or Verification Of Payment (VOP)
* Borrower's Authorization
* Purchase Sales Agreement
* 1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) -- used if borrower is self-employed

Up Next: We will delve into some info on banks and loans.
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Posted by Kai of zen | 7:25 AM |

Thursday, May 18, 2006

Beware! Predatory Mortgage Lending

Before we get into the mortgage loan process, I thought it would be better to know first about predatory lending and the traps you should look out for. Be careful, it seems there are people out there doing this. Research before you make any agreement.

The main concern is that mortgage brokers and lenders, operating legally, are finding loopholes in the law to obtain additional profit.

Some examples of predatory mortgage lending are:

* Encouraging applicants to include false informtion.
* Asking borrowers to leave signature lines blank.
* Failing to include Good Faith Estimates, Special Information Booklet, Truth in Lending and Hud-1 Settlement statement.
* Convincing borrowers to refinance a loan several times and each time increasing monthly payments or amounts owed.
* Loaning amounts higher than the value of the home.
* Not explaining unexpected costs at the settlement.
* Balloon loans: after a series of low payments the entire loan balance is due in a large lump sum.

Another unethical practice involves inserting hidden clauses in contracts in which a borrower will unknowingly promise to pay the broker or lender to find him or her a mortgage whether or not the mortgage is closed. Though regarded as unethical by the National Association of Mortgage Brokers, this practice is perfectly legal. Often a dishonest lender will convince the consumer that he or she is signing an application and nothing else. Often the consumer will not hear again from the lender until after the time expires and then the consumer is forced to pay all costs. Potential borrowers may even be sued without having legal defense.

Hope this helps you MLRB! readers and hope you will stay aware of these schemes, I think I came across something similar to this... it was a quick no from me. :)

Up next: I will be posting about the process!

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Posted by Kai of zen | 7:16 AM |

Wednesday, May 17, 2006

Mortgage Loan Types

Welcome back! Today we are covering mortgage loan types and some of their meanings.

There are many types of mortgage loans. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM).

In a FRM, the interest rate, and hence monthly payment, remains fixed for the life (or term) of the loan. In the U.S., the term is usually for 10, 15, 20, or 30 years. The only increase a consumer might see in their monthly payments would result from an increase in their property taxes or insurance rates (paid using an escrow account, if they've opted to use an escrow). But payments for principal and interest will be consistent throughout the life of the loan using an FRM.

In an ARM, the interest rate is fixed for a period of time, after which it will periodically (annually or monthly) adjust up or down to some market index. Common indices in the U.S. include the Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"). Other indexes like 11th District Cost of Funds Index, COSI, and MTA, are also available but are less popular.

Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain. Since the risk is transferred, lenders will usually make the initial interest rate of the ARM's note anywhere from 0.5% to 2% lower than the average 30-year fixed rate.

In most scenarios, the savings from an ARM outweigh its risks, making them an attractive option for people who are planning to keep a mortgage for ten years or less.

Additionally, lenders rely on credit reports and credit scores derived from them. The higher the score, the more creditworthy the borrower is assumed to be. Favorable interest rates are offered to buyers with high scores. Lower scores indicate higher risk to the lender, and lenders require higher interest rates in such scenarios to compensate for increased risk.

A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term. This payment is sometimes referred to as a "balloon payment". A balloon loan can be either a Fixed or Adjustable in terms of the Interest Rate. Many Second Trust mortgages use this feature. The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due. A contract could be written up so there would be more than one "ballon payment" required to be paid during the life of the loan.

Other loan types:

* blanket loan
* bridge loan
* budget loan
* Commercial Loan
* deed of trust
* equity loan
* hard money loan
* package loan
* participation mortgage
* piggyback loan
* reverse mortgage
* repayment mortgage
* seasoned mortgage
* term loan or interest-only loan
* wraparound mortgage
* Negative amortization loan

Sure seems like alot of info to digest, maybe later I will be detailing more specificly these additional types. Time to think about which loan I will need.

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Posted by Kai of zen | 7:18 AM |

Tuesday, May 16, 2006

Enough for Today

Well I think that is enough for today. I seems as if some of the basics are covered and tomorrow I hope to post more starting with some info on mortgage types and maybe start to dive into some basics of a loan and what is involved with banks.

Hopefully we can keep this b-log rolling (forgive the pun), I am trying to get a handle on this so I can apply it myself with a property we have. :) Thank you for reading MLRB! so far.

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Posted by Kai of zen | 11:41 AM |

Legal Aspects of a Mortgage

In this post we will try to cover the two types of legal Mortgage.

Mortgage by demise

In a mortgage by demise, the creditor becomes the owner of the mortgaged property until the loan is repaid in full (known as "redemption"). This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption.

This is an older form of legal mortgage and is less common than a mortgage by legal charge. It is no longer available in the UK, by virtue of the Land Registration Act 2002.

Mortgage by legal charge

In a mortgage by legal charge, the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.

To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority. Tax liens, in some cases, will come ahead of mortgages. For this reason, if a borrower has delinquent property taxes, the bank will often pay them to prevent the lienholder from foreclosing and wiping out the mortgage.

This type of mortgage is common in U.S. and, since 1925, it has been the usual form of mortgage in England and Wales (it is now the only form - see above).

In Scotland, the mortgage by legal charge is also known as standard security.

Hope this helps!
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Posted by Kai of zen | 11:32 AM |

Mortgage Terminology

In this post we will try to cover some of the terminology:

Each legal system tends to share certain concepts but vary in the terminology and jargon they use.
In general terms the main participants in a mortgage are:

Creditor

The creditor has legal rights to the debt secured by the mortgage and often make a loan to the debtor of the purchase money for the property. Typically, creditors are banks, insurers or other financial institutions who make loans available for the purpose of real estate purchase.

A creditor is sometimes referred to as the mortgagee or lender.

Debtor

The debtor or debtors must meet the requirements of the mortgage conditions (and often the loan conditions) imposed by the creditor in order to avoid the creditor enacting provisions of the mortgage to recover the debt. Typically the debtors will be the individual home-owners, landlords or businesses who are purchasing their property by way of a loan.

A debtor is sometimes referred to as the mortgagor, borrower, or obligor

Other participants

Due to the complicated legal exchange, or conveyance, of the property, one or both of the main participants are likely to require legal representation. The terminology varies with legal jurisdiction; see lawyer, solicitor and conveyancer.

Because of the complex nature of many markets the debtor may approach a mortgage broker or financial adviser to help them source an appropriate creditor typically by finding the most competitive loan.

The debt is sometimes referred to as the hypothecation, which may make use of the services of a hypothecary to assist in the hypothecation.

Hope this was of help!
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Posted by Kai of zen | 10:57 AM |

well first things are first

I am going to start posting information relating to mortgage, loan and refinancing so I can help educate (hopefully) myself and others. This will help create more educated posts and I hope it brings more MLRB! readers. :)

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Posted by Kai of zen | 10:29 AM |

Ok, What is a Mortgage?

A mortgage is a method of using property as security for the payment of a debt.

The term mortgage (from Law French, lit. dead pledge) refers to the legal device used in securing the property, but it is also commonly used to refer to the debt secured by the mortgage.

In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) and in some cases only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals or businesses can purchase residential or commercial real estate without the need to pay the full value immediately.

In many countries it is normal for home purchase to be funded by a mortgage. In countries where the demand for home ownership is highest, strong domestic markets have developed, notably in Great Britain, Spain and the United States.

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Posted by Kai of zen | 9:03 AM |

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