Q&A WITH MARK SPRAGUE
Mark Sprague is a noted and respected expert on the real estate industry and the Austin market, in particular. He is also the Director of Business Development for Mission Mortgage and we are fortunate to have access to his expertise and opinions. Mark receives numerous questions each week and today he is going to address a number of mortgage-specific questions he has received recently. Today, Mark addresses some very specific questions about mortgages and some of the product options currently available.
QUESTION: What is the difference between a pre-approval, pre-qualification and final loan approval?
ANSWER: A pre-approval is a fully processed loan approval based on a proposed purchase scenario. For a Pre-approval the lender treats the loan like any Mortgage application for a purchase except there is no specific property associated with the application. The lender will collect and review all income, asset, and credit information and make a credit decision resulting in a written Pre-approval document indicating the maximum purchase price and mortgage you can afford for a specific loan program and rate. With a pre-approval you have completed 80% of the mortgage approval process and once you find a property can proceed quickly. Negotiating a purchase with a pre-approval in hand can also be very powerful when negotiating the purchase. On the other hand, a Pre-Qualification is when a mortgage lender reviews your information, usually in an interview, and based on the information provided renders an opinion of your qualification for a mortgage. Bottom line is a Pre-approval is much more powerful and reliable when actively pursuing a home purchase. While a pre-qualification is a great place to start in the home buyer process to learn what’s required and how much you can afford.
QUESTION: What is a temporary mortgage buy-down and how does it work?
ANSWER: A temporary buy-down reduces the monthly payment on your mortgage for a specific period of time. The most common time frame is for the first thru third years of the mortgage. If today’s 30 year fixed rate is 5% you can do a 3-2-1 temporary buy-down, which means your 1st-years rate will be 3% below the loan’s fixed rate. In this case it will be 2% for 12 payments. Then 2% below, or 3%, for the next 12 payments, and for the 3rd-year the 12 payments will be at 4%. Thereafter it will return to and remain at 5%. The cost is exactly the difference between the payments you make during the period and the 5% payment. This money is collected upfront and held in an account to subsidize your payment each month. These programs are often used by builders and sellers as an incentive to buyers.
QUESTION: I recently got approved for a mortgage, we went to contract on the home, and are prepared to set a closing date. When the rate-lock expired because of other issues with the seller, my bank suddenly asked for more information and documentation from my accountant. Is this standard? Why would I be approved and then after 60 days they require more information?
ANSWER: This is rather common, and often catches buyers off guard when a closing is delayed and the process feels like it is starting all over again. If you read the approval letter it most likely refers to document expirations. This occurs because documentation you provided has an expiration date and depending on the document’s type, lending guidelines require that documents need to be current within 60 to 90 days from closing.
QUESTION: What is the difference between a foreclosure and a short sale?
ANSWER: When you buy a foreclosure the bank is the owner of the property. When you buy in a short sale the homeowner is still the legal owner. A short sale is where the bank agrees to accept less than the amount owed on the mortgage to allow the owner to sell the property. This is often better for the bank since they save the cost of the foreclosure process. A foreclosure is a property that the bank has taken ownership of after an owner failed to pay their mortgage.
QUESTION: My husband and I just found our dream home- we are already pre-approved, however, the rate we are getting is still kind of high. Someone mentioned to us that we should buy discount points. How do we know if this pays for us, or if we are better off with the higher rate?
ANSWER: Discount points are pre-paid interest and are calculated as 1 percent of the mortgage amount for each “point”. Paying these points upfront will reduce your mortgage rate and therefore your payment. The trade off is that you are paying substantial money upfront that will be returned to you over time in the lower payments. As a general rule of thumb each 1 discount point will reduce your rate by ¼ % and you will recoup this back between 4 and 5 years in the lower payments.