Straight Talk About Real Estate

If you have good credit, a FICO score of over 720, you can qualify for just about any loan amount you want. But just because you qualify doesn’t mean you should get that loan.

With good credit, a lender would allow your housing payment to be 40% or even 50% of your gross monthly income. There’s not much money left at the end of the month after you make your housing payment. In order to avoid eating beans every night, you should borrow less than you qualify for. So adjust your loan amount according to your payment instead of asking the lender to qualify you for as much as possible.

To continue with yesterday’s post, why would anyone want a loan with a prepayment penalty?

Most B-Paper loans for those who do not have good credit will likely have a prepayment penalty. For taking a higher credit risk, the terms offered by lenders are understandably more costly.

Loans may also have a prepayment penalty clause for giving a lower interest rate.

Most loans have an option to buy out the prepayment penalty at the time you obtain the loan. You can pay upfront fees or a higher interest rate to remove the prepayment penalty clause. That way, if you do sell, refinance, or make extra payments to pay off the loan more quickly, you would not incur that prepayment cost.

When obtaining a loan, make sure you ask the lender if you would have to pay a prepayment penalty if you decide to pay off the loan early. Some loans can have anywhere from one year to three years prepayment penalty period where if you pay off the loan within that time, you pay a penalty. The penalty is usually six months of interest, which is quite a hefty amount.

If you do have a prepayment penalty clause in your loan, make sure that you do not plan to sell the house, refinance, or make extra payments to pay off the mortgage more quickly within that prepayment penalty period.