WHAT IS A FICO SCORE?
A leading credit indicator used by lenders to determine risk based pricing is the FICO (Fair Isaac Company) Score. Mortgage lenders use FICO Scoring to speed up
the loan application process by simplifying credit review. Recently – in the last two
years – Fannie Mae and Freddie Mac have also incorporated FICO Scoring into their credit documentation requirements on prime mortgage loans.
Definition: FICO Scoring is a formula for credit risk assessment that is believed to
be highly predictive of future payment risk.
Calculation: The borrower’s score is calculated based on assigned numerical values
for certain credit characteristics. The higher the overall score the less risk there is
for the lender.
Higher risk characteristics: Bankruptcy, Non-bankruptcy derogatory public records, Charge-offs or loan defaults, Repossession, Serious delinquency
Additional characteristics that determine credit score: Number and age of trade lines, Presence of derogatory trade line information, current level of indebtedness, Types of credit available (revolving vs. installment), Amount of time credit has been in use, Credit inquiries etc.
Weight: Credit usage is the key factor. Each characteristic is weighted according to its “predictive power.” Those factors with the highest weights are collections, judgments, bankruptcies, late payments, current balances, too few or too many revolving accounts, finance company accounts, number of accounts opened in the past 12 months, collections and number of credit inquiries made. Fico Scoring looks at credit patterns over a period of time. A history of late payments and high credit balances will have a serious effect on an individual’s score.
Errors: Errors on credit reports occur for many reasons. In the case of a divorce, your buyer’s credit may be impacted if the spouse does not maintain payments, even if the court made the spouse responsible for the outstanding debt. If your buyer has a bankruptcy that was discharged, there may be outstanding charge-offs or unpaid collections on the report that in fact were discharged through the bankruptcy. Encourage your buyers to check their credit reports at least one per year. If your buyer feels there are errors contained in their credit report, they should contact the credit bureau. According to the Fair Credit Reporting Act, borrowers may fill out credit dispute forms and file them with the credit bureau for investigation. They may do so by contacting the appropriate credit repository.
WHAT IS APR?
APR Reflects the cost of a mortgage loan as a yearly rate. This rate may be higher than the rate stated in the mortgage or deed of trust note because the APR includes, in addition to interest, points, fees, and other credit costs.
The lender is required, usually within three days of receiving a loan application, to give or mail to the borrower a Truth-in-Lending statement that will disclose the “annual percentage rate” (APR). The annual percentage rate (APR) can be a valuable tool to help shop for a mortgage, but only when you know how to use it. An APR measures the total cost of the loan (including interest, points and fees) and compares this cost to the amount borrowed. You could call an APR the “effective” interest rate because points and fees are also included.
For more detailed information regarding Truth-in-Lending, contact the Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, Washington, D.C. 20551 or go to www.federalreserve.gov
WHAT IS AN ESCROW?
An escrow is created when money and/or documents are deposited by two or more persons with a third party which are to be delivered upon the happening of certain conditions. The third party is known as the escrow agent or escrow holder.
The authority given to an escrow holder is strictly limited by instructions provided by the parties involved. Consequently, an escrow holder acts on mutual instructions deposited into escrow and DOES NOT represent any party. The escrow officer is authorized by instructions to allocate funds for items during the escrow period, such as real estate commissions, title insurance, liens, recording fees and other costs. Instructions also specify the method of collecting funds, proration issues, time limitations and all the terms of the transaction. The escrow process protects all parties involved by retaining money and documents until the mutual instructions are met.
The statutory definition of escrow is found in Section 17003 of the California Financial Code and reads as follows:
‘Escrow’ means any transaction wherein one person for the purpose of effecting the sale, transfer, encumbering, or leasing of real or personal property to another person, delivers any written instrument, money, evidence of title to real or personal property, or other thing of value to a third person to be held by such third person until the happening of a specified event or the performance or a prescribed condition, when it is then to be delivered by such third person to a grantee, grantor, promisee, promisor, obligee, obligor, bailee, bailor, or any agent or employee of any of the later.
Common Escrow Questions:
HOW DO I OPEN ESCROW?
As soon as you execute your purchase agreement, your real estate agent will
deposit your initial down payment into your escrow account. Your escrow officer
will then send you escrow instructions.
HOW WILL I KNOW WHERE MY MONEY HAS GONE?
Written evidence of your deposit is included in your copy of the purchase agreement. Your funds will then be deposited in your separate escrow account.
WHAT DO I DO NEXT?
You will want to speak with your credit union, bank, Mortgage Company or savings
and loan. You will be required to complete a loan application, which will require personal and financial information.
WHAT HAPPENS AFTER I SUBMIT THE LOAN APPLICATION?
The lender will begin the qualification process including verification of items submitted on the application and appraisal of the value of the property.
ASSUMING THE LOAN IS APPROVED, WHAT’S NEXT?
Your escrow officer will make an appointment for you to sign your final loan papers. At this time, the escrow officer will also tell you the amount of money you will need to buy your new home. Your loan funds will be sent directly to the escrow by the lender.
WHAT ARE ESCROW INSTRUCTIONS?
Escrow instructions define all the conditions that must occur before the transaction can be finalized. Your escrow instructions represent your written statement to the escrow holder protecting your interests. They authorize the escrow officer to order title insurance, which provides ownership protection for your new home.
WHEN DO I SIGN ESCROW INSTRUCTIONS?
Your escrow officer will send escrow instructions to you for signing along with other forms such as: vesting instructions, statement of confidential information, and change of ownership form. Be sure to return your signed instructions and forms as soon as possible.
WHAT DO I NEED TO DO BEFORE MY APPOINTMENT TO SIGN PAPERS?
Cashier’s Check: Obtain a cashier’s check made payable to the escrow company in the amount indicated to you by escrow.
Lender’s Requirements: Make sure you are aware of your lender’s requirements and that you have satisfied those requirements before you come to the escrow company to sign your loan documents.
Hazard Insurance: If you are purchasing a single family home, detached home, be sure to order your hazard insurance. Then call your escrow agent with the insurance agent’s name and phone number. You must have secured hazard insurance before the lender will send its money to the escrow company.
Identification: Please bring a driver’s license or passport (photo ID) for each person who will be on the title with you to the escrow company. This is needed so that your identity can be verified by a notary public. It is a necessary step for your protection.
WHAT IS THE NEXT STEP AFTER I’VE COMPLETED MY SIGN OFF?
After you have signed all the instructions and documents, the escrow officer will return them to the lender for review. This usually occurs within a few days and upon completion, the lender is ready to fund the loan and advise escrow.
WHAT IS AN “ESCROW CLOSING”?
It is the culmination of the transaction. It signifies legal transfer of title from the seller to you. Usually the Grant Deed and Deed of Trust are recorded within one working day of the escrow’s receipt of loan funds. This signifies the close of escrow.
WHEN WILL I RECEIVE THE DEED?
The original deed to your home will be mailed directly to you at your new home by the County Recorder’s Office. This usually takes several weeks, sometimes longer.
WHAT IS TITLE INSURANCE?
Insurance is broadly defined as a contract obligation whereby one party agrees to indemnify or reimburse another party for loss or damage that may occur under theterms and provisions of their contract. The contract referred to is called a policy.Unlike casualty or life insurance which insure on future events, Title Insuranceinsures with these few exceptions against past events. It insures the ownership ofthe property and all matters pertaining to its past history.
When dealing with policies of title insurance, the term “public record” is mentioned quite frequently. The public records that are examined generally include those in the following offices:
- Any taxing authority that levies taxes or assessments on real property;
- The county Recorder of the county in which the property is located;
- The clerk of any of the county courts referred to variously as Circuit, Probate, Superior, Juvenile, Municipal, Small Claims, Domestic, etc., and Clerk of the U.S District Court as to bankruptcy proceedings where the records of the original proceeding are kept in the same county in which the property is located.
To search the public records adequately, the title company must examine, summarize and classify every document affecting the property and the status of the various owners. Highly skilled title searchers assemble this material and present the title search to a title officer. The title officer or examiner then writes an opinion as to the document of the record. This opinion will initially take the form of a preliminary title report and finally a policy of Title Insurance.
The policy of Title Insurance not only insures the ownership of the property, but excepts from coverage those matters to which said ownership is subject to. The title policy shows the condition of title and matters like taxes, conditions and restrictions.
Premiums for the policy of the Title Insurance are based on the amount of liability assumed. The liability on a transaction is determined by the sales price of a parcel of property or in the event a loan policy is requested, then in the amount of the loan. The premium is a one-time charge and the policy will remain in effect so long as the insured, the heirs or assigns retain the respective interest in the property. Source: First American Title Insurance Company