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Commitment is not anything new for buyers in the mortgage industry, but it is not a factor that most buyers or sellers are aware of. To both buyer and seller, words can indicate a lender’s true commitment level in regard to approving a mortgage loan. There are three terms that buyers and sellers should know when it comes to financing and a buyer’s ability to close the transaction successfully:
- Pre-Qualification – Good
- Pre-Approval – Better
- Letter of Commitment – Best
Your mortgage lender can provide you with a Letter of Commitment which puts you in a position to be the strongest buyer as well as avoiding disappointing news at the time of closing.
Pending Sales are up all over the nation. This is great news as it is an indicator of a stabilizing real estate market. But nothing is more disappointing to the buyer, seller and the mortgage broker than to discover when the pending sale should be closing, that the sale is canceling because loan approval could not be obtained.
Everyone can be spared a lot of emotional elation (signing the contract) and grief (canceling the contract) if the buyer has a Letter of Commitment in hand.
Buyers know that they need to be pre-qualified and many times are falsely assured by this term. In the recent past buyers, sellers, and Realtors® were very comfortable and confident when a buyer presented a Pre-Qualification Letter with their offer to purchase. However, you need to be very clear that pre-qualification is not a guarantee that a buyer will be approved for a real estate loan.
Pre-Qualification Letters are good but, speaking in general, it is only as good as the paper it is written on. As a general rule, little (or no) documentation has been received by the mortgage broker regarding the buyer’s ability to buy.
Sellers and buyers need to know that even though the buyer has been pre-approved for a mortgage loan it is not a guarantee that the buyer will be able to complete the sale.
A Pre-approval Letter is a much stronger commitment on the mortgage lender’s part. The documentation phase of the loan has been started and based on the information currently on file, it apprears that the buyer will be able to complete the transaction. An uunderwirtter may or may not have reviewed the file. An underwriter’s signature always makes a Pre-Approval Letter stronger.
Buyers and sellers need to be aware that a buyer can obtain a Letter of Commitment. While there can never be a 100% guarantee a loan will be approved, this is as good as it gets. A Letter of Commitment will be signed by an underwirter. This means that the file has been reviewed and the underwritter has obtained all documentation needed to approve the loan. The only items missing to make the file complete is the property address, current appraisal and proof of homeowner’s insurance.
Buyers, speak to your lender. Sellers, speak to your Realtor® for the customs in your area. Remember, everything “real estate” is very local. Real estate is greatly influenced by the area in which the property is located including terminology, sales prices, who pays what fees and lender’s qualifcation letters.
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Sellers and buyers should also be aware of the newest developments in lending guidelines, Risk Based Financing .Another Realtor’s® opinion: A loan commitment, or just a letter with numbers and information
Risk-based financing is not the new buzz word in the mortgage industry; it is now the defining word when it comes to real estate loans.
- What does it mean?
- Who does it affect?
- What does it affect?
What does it mean? Risk-based financing means that borrowers will be charged loan fees based on their financial risk as a borrower. Determining factors will be credit scores and loan-to-value-ratios.
Who does it affect? Risk-based financing will affect all borrowers who apply for a mortgage loan.
What does it affect? Risk-based financing will affect how much a borrower will pay in loan fess? and mortgage insurance premiums.
FHA has the most flexible guidelines in regards to credit history. However, FHA has already instituted risk-based financing in regards to the mortgage insurance premiums a borrower must pay. Mortgage Premium Insurance will be based on a borrower’s credit score and payment history.
Fannie Mae and Freddie Mac has announced that they will be implementing a risk-based structure as well. Fannie Mae and Freddie Mac risk-based pricing will be determined by both a borrower’s credit score and loan-to-value ratios. The new fee structure will take effect on November 1 and November 7, 2008 (respectively).
To be forewarned is to be forearmed. You should always consult with a qualified mortgage lender to determine your purchasing ability and power.
Learn More:
FHA – Risk-based Pricing Adjustment
For those of you outside of the Calvert County area, CCPS stands for Calvert County Public Schools.
It is widely accepted by many that good schools are a reflection of a good neighborhood. One of the defining qualities in the real estate mantra “location, location, location” is the quality of the schools in the neighborhood.
I am very happy to report that the schools in the Calvert County Public Schools system just keep getting better and better.
According to an article in the Washington Post, Calvert County Public Schools is a district that is “often overlooked in lists of the Washington area’s best”.
For the past four years, the students attending school in the CCPS system have gained ground when taking the Maryland School Assessment tests (MSA). The Maryland School Assessment tests for 2008 revealed that that 91% of the students (grade levels 3 – 8) were rated as proficient or advanced in their reading scores. 86% of the students were rated as proficient or advanced in math. These scores earned Calvert County Public Schools third place (reading) and fourth place (math) in the state.
Calvert County Public Schools system also ranks second in the Washington area’s 13 school systems for highest graduation rates (at 86%), according the newspaper Education Week. In addition to the higher tests scores achieved, the number of high school students taking at least one college-level course has doubled in the past four years.
The Calvert County Public Schools administrators and teachers are creating innovative ways to meet the educational needs of their students and it is paying off. CCPS is also working diligently to
> attract high-quality teachers and keep them. Currently, CCPS offers the highest median salary to its teachers.
Congratulations Administrators, Teachers and Students for a job well done. Continue the good work.
The recent passage of the Housing and Economic Recovery Act of 2008 has set new loan loans limits for the Federal Housing Authority (FHA), the Veterans Administration Home Loan Program (VA), Fannie Mae and Freddie Mac.
One of the goals of The Housing Bill and Economic Recovery Act was to stimulate the housing market. The Housing bill offers tax credits for first time buyers and has revised existing loan limits in many of the nation’s metro areas.
The Economic Stimulus Package raised loan limits for FHA loans on a temporary basis, but the passage of the Housing and Economic Recovery Act of 2008 makes the change in FHA loan limits permanent. The Housing and Economic Recovery Act has also allowed Fannie Mae and Freddie Mac to raise their conforming loan limits.
Loan limits vary by region. The new loan limits for Calvert County have been increased to $729,750 for FHA, Fannie Mae and Freddie Mac. The VA loans limit was increased to $417,000.
Most homes in Calvert County are purchased via conventional financing terms; most of these loans are backed by Fannie Mae and Freddie Mac. The loan guidelines currently require 10% – 20% down with a minimum FICO score of 660. Please consult a qualified lender for required down payment and qualifying information.
The second most popular loan in Calvert County is insured by FHA. FHA loans offer buyers the benefit of purchasing a home with only 3% down and will accept FICO scores less than 660. Funds for the down payment can be gifted by a family member. Currently FHA allows down payment assistance from non-profit organizations. Unless amended, please be advised that after September 30, 2008, down payment assistance via non-profits will no longer be allowed. Please consult an approved FHA lender for qualifying guidelines and information. If you need down payment assistance, you are running out of time. You must secure financing and close escrow on or before September 30, 2008.
Following FHA in popularity is the VA home loan program which offers qualifying veterans the advantage of purchasing a home with no down payment and no closing costs. A VA funding fee is required but can be financed into the loan. For eligibility requirements and “no costs” information, consult a qualified lender.
