Approved Advisor

There are three main credit bureaus — Transunion, Experian, and Equifax — and that they give you a grade on your credit-worthiness according to what your creditors report to them.

While each of these three bureaus may have some small variables that differentiate their scoring, the FICO scoring model is still the heart. FICO stands for Fair, Isaac and Company, the group that designed the model. Here is how they say the score breaks down:

• 35% – payment history
  
• 30% – amounts owed
  
• 15% – length of credit history
  
• 10% - types of credit
  
• 10% – new credit
  

I discuss with each of my clients each one of these factors in great detail, and how to get the most benefit from each part of the credit model. First, though, how do you get your hands on your own credit report?

Getting a credit report is quite simple, but getting your credit score can be much trickier. Make sure any company you pay to send you your credit report is also sending you the credit score, so you know the exact number that lenders are receiving. (Most companies will charge extra to show you the scores.)

Often times a prospective homebuyer can’t come up with sufficient funds for a down payment in order to qualify for a mortgage on the home they want to purchase. While there are a number of options available, including second mortgages or low-money down mortgages, another alternative would be to procure the necessary funds from a family member. Gift funds must be received from a relative, not a friend or acquaintance.

In most instances, Gift Funds are permitted as long as it is properly documented and within the program guidelines. The proper documentation of the gift funds is critical to your loan transaction. The underwriter places a great deal of emphasis on establishing a formal paper trail of the “source of funds”. As such, it is very important that you review and understand the requirements with me so we can address any unique circumstances as they may pertain to your situation.

Furthermore, a Gift Letter will be required, and will need to be executed by the donor(s) prior to acceptance of the form. This is a document that only the loan Underwriter will view to make certain the funds aren’t additional liability and that you have full access and approval to use them as needed for your mortgage. Proof will also be necessary to verify that you received the funds; so again, we must collaborate to make sure you understand what to expect.

Click here for a copy of our gift letter. (Gift Letter) Similar letters and verbiage are acceptable provided you have them pre-approved with us.

Prime Rate is the base interest rate that is charged to the most credit worthy bank consumers. These loans are typically extended to things such as credit cards and home equity lines of credit, as well as most small business loans.

Like LIBOR, the Prime Rate is also tied to the Fed Funds Rate, normally 3 points higher than the published Fed Funds Rate.

Adjustments to the prime lending rate are usually made by banks at the same time; although, the prime rate does not adjust on any regular basis. After the Fed changes the Fed Funds rate, the Prime Rate will change at the beginning of the subsequent month.

Rates are based upon the prime rates published on the first day of each respective month.

The “London Interbank Offered Rate” (LIBOR) is the interest rate that banks pay one another, when borrowing money from other banks anywhere in the world (primarily in the international wholesale money market based in London).

There are various types of LIBOR rates including the 1 week LIBOR, 1 month LIBOR, 6 month LIBOR, and 1 year LIBOR; these are the rates banks would pay if they want to borrow funds for 1 week, 1 month, 6 months, etc. Although Rate calculations contain complex variables such as time, maturity and currency rates, LIBOR rates are very closely related to the Fed, in that LIBOR most often changes when the market anticipates that the Fed will change their Fed Funds Rate.

LIBOR is also the base rate that is used on most adjustable rate mortgages (ARMs) in the US and large corporate / commercial loans. The reason LIBOR is used most often for US adjustable rate mortgages is because LIBOR is really the most accurate measure of a bank’s cost of borrowing funds since most banks do business internationally these days.

The Fed Funds Target Rate

The actual Fed Funds Rate is the overnight interest rate at which depository institutions lend to other depository institutions. This rate is determined by the Fed because banks in the U.S. are part of the Federal Reserve System. Adjustments to the Fed Funds Target Rate are made by the Federal Open Market Committee (FOMC), usually at regularly scheduled meetings; but can also be adjusted at any time using emergency meetings. 

The Fed’s main role is to maintain “monetary stability” which they attempt to do by keeping a close eye on the flow of money throughout the economy using the Fed Funds and Discount Rates.

The Discount Rate is the interest rate that banks pay when they borrow money directly from the Fed.

The rate has been largely symbolic in the past because hardly any banks utilized this source or method of obtaining funds. These days, with the ailing financial market, this window is one of but a few options for banks and financial institutions in dire need of liquidity.

There are primarily two ways that participating Banks use the discount window to get short term:

• Issuing “commercial paper” – these are short term “IOU’s” of typically one to ninety days that are sold on the open market to Wall Street investors. Interest rates on these short term loans are often better than the discount rate offered by the Fed
  
• Borrowing money from other financial institutions using the Fed Funds Rate (Also see “Fed Funds Rate” description). In most cases, this rate is also better than the discount rate offered by the Fed
  

Many sellers think that the price of their home is determined solely by what they are willing to accept and what the buyer is willing to pay. However, there is one more variable that can affect the market value of a home assuming that a bank loan is involved — the lender’s appraisal.

To protect the interest of their investors, the buyer’s mortgage lender hires a licensed appraiser to give an independent, objective opinion of what the property is worth. The appraiser compares the house with similar homes in the neighborhood that have recently sold. Square footage, amenities and the condition of the home are taken into account. Renovations and home improvements made by the seller usually add value to the home, while defects such as needed repairs or code violations decrease the property’s value. The seller’s real estate agent can provide the appraiser with up-to-date information about neighboring homes that have sold to support the seller’s asking price.

The appraiser looks for three similar houses that have sold in the same area within the last several months, and compares the selling prices of these homes with the one that is now on the market. The appraiser makes adjustments to account for the differences in each property, and averages the adjusted prices of the other three homes to arrive at a final opinion of value. In subdivisions or condominium projects where there are many similar properties and numerous recent sales, the appraiser’s job is relatively easy. In neighborhoods of older homes that have been renovated or remodeled over the years, it can be like comparing apples and oranges.