What is a mortgage?
Generally speaking, a mortgage is a loan obtained to purchase real estate. The "mortgage" itself is a lien (legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.
What is a loan to value (LTV) and how does it determine the size of my loan?
The LTV ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000) and would have to pay $2,500 as a down payment.
The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV, the less cash homebuyers are required to pay out of their own funds. To protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.
What is earnest money and how much should I set aside?
Earnest money is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. If you back out of a deal, you may forfeit the entire amount.
What types of loans are available and what are the advantages of each?
You will most commonly hear about two loan types: Fixed Rate Mortgages and Adjustable Rate Mortgages (ARM).
With Fixed Rate Mortgages, your payments remain the same for the life of your 15-year or 30-year loan. The advantages to this are predictable payments and your housing cost remains unaffected by interest rate changes and inflation.
With an ARM, payments increase or decrease on a regular schedule with changes in interest rates; increases are subject to limits
There are two types of ARMs:
- Balloon Mortgage - Offers very low rates for an initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is due or refinanced (though not automatically)
- Two-Step Mortgage - Interest rate adjusts only once and remains the same for the life of the loan
An ARM is linked to a specific index or margin. The advantage to this is that it generally offers lower initial interest rates, monthly payments can be lower, and the borrower may be able to qualify for a larger loan amount.
When do Adjustable Mortgages (ARMs) make sense?
An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and are not concerned about potential increases in interest rates.
Can I pay off my loan ahead of schedule?
Yes. Choosing to increase your payment each month or make an extra payment at the end of the year can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.
Are there special mortgages for first-time homebuyers?
Yes. Lenders now offer several affordable mortgage options, which can help first-time homebuyers overcome obstacles that may have made purchasing a home difficult in the past. Lenders may now be able to help borrowers who do not have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or who have experienced income irregularities.
How large of a down payment do I need?
There are mortgage options now available that only require a down payment of 5% or less of the purchase price of the home. Some mortgages do not require a down payment at all. But the larger the down payment, the less you have to borrow and the more equity you will have in your home.
Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you will also need money for closing costs, moving expenses, and potentially repairs and decorating.
What is included in a monthly mortgage payment?
The monthly mortgage payment mainly pays off principal and interest. Most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable). Be sure to inquire what is specifically included so you can plan for excluded expenses accordingly.
What factors affect mortgage payments?
The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the amount of your mortgage payment.
How does the interest rate factor in securing a mortgage loan?
A low interest rate allows you to borrow more money than a high rate when comparing the some monthly payment. Interest rates can fluctuate as you shop for a loan, so ask lenders if they offer a rate "lock-in" which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.
What happens if interest rates decrease and I have a fixed rate loan?
If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate less than your current one, refinancing is smart if you do not pay more in fees than you will save in the time you will live in the house.
What are discount points?
Discount points allow you to lower your interest rate. They are essentially prepaid interest with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or .125) of a percentage point. When shopping for a loan, ask lenders for an interest rate with 0 points, and see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since the points can lower the monthly loan payment. Points are tax deductible when you purchase a home, and you may be able to negotiate for the seller to pay for some of them.
Are there any costs or fees associated with the loan origination process?
Yes. When you turn in your application, you will be required to pay a loan application fee to cover the costs of underwriting the loan. This fee pays for the home appraisal, a copy of your credit report, and any additional charges that may be necessary. The application fee is generally non-refundable.
What is an escrow account? Do I need one?
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. An escrow account is a good idea because it assures money will always be available for these payments. If you use an escrow account to pay property tax or homeowner's insurance, make sure you are not personally penalized for late payments since it is the lender's responsibility to make those payments.
How can I find out information about my credit history?
There are three major credit reporting companies: Equifax, Experian, and Trans Union. Obtaining your credit report is as easy as calling and requesting one. Once you receive the report, it is important to verify its accuracy. You’ll want to double check the "high credit limit," “total loan," and “past due" columns. It is a good idea to get copies from all three companies to assure there are no mistakes, since any of the three could provide a report to your lender. Contact the reporting companies at the numbers listed for more information.
Credit reporting companies
Trans Union: 1-800-916-8800
What if I find a mistake in my credit history?
Simple mistakes are easily corrected by writing to the reporting company, pointing out the error, and providing proof of the mistake. You can also request to have your own comments added to explain problems. For example, if you made a payment late due to illness, explain that for the record. Lenders are usually understanding about legitimate problems.
What is a credit bureau score and how do lenders use them?
A credit bureau score is a number based upon your credit history that represents the possibility that you will be unable to repay a loan. Lenders use it to determine your ability to qualify for a mortgage loan. The better the score, the better your chances are of getting a loan. Ask your lender for details.
What factors can impact my credit score?
A credit score is accrued from many sources (for example, auto loans, utility providers, cellular phone provider) over many years. While there is not an instant way to boost your credit score, committing to diligence in paying bills on time, balancing your lines of credit or “income to debt ratio,” and reigning in unnecessary spending will all impact your credit score.
Should I be pre-qualified before beginning a house hunt?
We highly recommend pre-qualify for a home loan before you start house hunting because you will have a better understanding of how much you can comfortably afford. Once you are pre-qualified, your loan officer will be able to discuss which home loan programs suit your financial circumstances.
Can I qualify for a home loan if I have past credit problems?
We are finding many borrowers that have rearranged their priorities as well as their spending habits. Many have learned valuable lessons from their bad experiences and have come through their "healing time." They are now ready for home ownership.
It is important to note that there is a big difference between a person who had a bad credit experience in his or her life and a person who is a bad credit risk.
The main questions your lender will consider are:
- What happened? What was the cause of your particular financial problem?
- What did you do about it? Did you make every effort to try to work things out?
- What steps have you taken to ensure it does not happen again? Are you back on your feet? Did you make the right changes?
The more difficult the credit problems, such as bankruptcy and foreclosure, the more important the explanation and the more healing time will be necessary. We have all had some pretty tough times at one point or another.
Do not be afraid or embarrassed about trying to start again. Everyone deserves a second chance!
Can non-citizens qualify for a home loan?
Each loan type has different guidelines for citizens of other countries. FHA requires that the home you are buying in this country is your primary residence. You must have a Social Security card as well as all of the other documentation required for FHA buyers.
Fannie Mae requires that you have permanent resident alien status - a green card. If you are a non-permanent resident alien, an additional down payment, as well as permission to work in the United States for extended periods through a work visa, is required, and you must occupy the property.
Freddie Mac underwrites loans for permanent and non-permanent residents alike, with no special requirements for the latter. It is important that you make an appointment with your lender before you select a home so that you will be aware of the financing available for your particular situation.
What are some qualifying tips for a buyer relocating with his or her company?
The number one tip is—do not pack your personal papers! Mortgage loans are very precise and require documentation furnished by the borrower. Keep your financial records with you until your new loan closes. You may also be prepared by knowing the exact details of your relocation policy. These are a few of the items your lender will want to know:
Will your company buy your present home or issue an equity advance?
If your home does not sell, will your company make the payments for you until it does sell?
Will your company pay your closing costs on your purchase? If so, will they advance the funds or reimburse you after closing?
It is important to keep copies of any advance checks you may receive as well as all documentation on your move. It is much easier to keep all this documentation handy rather than to try to find it when you are trying to close.
Can a recent college graduate buy a home?
Most loan types are very interested in financing recent graduates. Many investors will use your college credits in your chosen field to determine your experience. In most cases, they also expect that you have established very little credit. This is acceptable as long as the credit you have established is good.
What is an 80-10-10?
The phrase 80-10-10 is mortgage language used to refer to a financing option you could choose in an effort to avoid Private Mortgage Insurance (PMI). The “80” refers to an 80 percent first-lien mortgage. The first “10” refers to a 10 percent second-lien mortgage, and the third “10” refers to the required down payment of ten percent.
One of the advantages of using this type of financing is the potential income tax deductibility of the interest on the second lien versus the non-deductible insurance payment of PMI. You also will have the guarantee that the second-lien financing will eventually be gone, and you will have only the first lien to pay monthly.
How can I be sure to get an interest rate advertised by a lender?
Home loan interest rates change on a daily basis. They can change more than once a day. When you get a quote, it becomes your rate once you lock-in with your selected lender. A lock-in is a promise (in writing) to close your loan at a certain interest rate and points.
You should have a lock-in agreement with clearly defined terms. These terms include an expiration date, interest rate, and points paid by buyer and seller, and they usually include the expectations you should have of your lender as well as those it has of you. Be sure you understand all of the rules involved.
It is important that you know about your lender's strength and reputation. The promise offered to you is made more valuable by these two. Once you read this disclosure carefully and agree to the conditions, be sure you have a fully accepted and executed copy for your files. This is your contract with your lender and protects your interest rate.
Why do mortgage interest rates go up and down so dramatically?
Many years ago, savings and loan institutions made the majority of home mortgage loans. They would often set a rate for new home loans for long periods of time - up to a month or so. As the lending industry has evolved, the buying and selling of mortgages has become very sophisticated, and there are many different investors making new home mortgage loans. The easiest indicator you can follow in watching the direction of interest rates is the bond market.
Although interest rates usually have long periods of decline or increase, there are many days when rates may jump up or down dramatically -just as the bond market can. These are often referred to as "hiccups." When rates begin to go higher for a long term, it will be (as history has proven) a slow, steady increase. It is the trend you will want to follow. Is the overall trend up or down? Don't let those daily "hiccups" alarm you.
Is there anything I should know about new construction financing?
Your loan will be approved well in advance, and you will want to be prepared as your home building progresses and you prepare to close. The following is a list of six helpful hints:
- Be sure you understand and can comply with all of the conditions of your loan approval.
- Let your lender know of any changes to be made to the house, the sales price, or any contract changes.
- Do not make any changes to your financial position without consulting your lender. It may not be wise to buy a new car before closing your mortgage loan if it affects your loan approval.
- Save copies of all major paperwork that might influence your loan. For example, save copies of any bonus checks you might receive.
- Notify your lender when you are within 60 days of closing. You will probably be at the building site and in communication with the builder to know this approximate date. It is important to notify your lender so that any updates that are necessary can be accomplished.
- Use extreme caution concerning setting your closing date and time. If you give notice where you are currently living and must be out by a certain date, it will be very uncomfortable if the home is not complete and will not pass final inspection. Many times buyers get approved for their home loan, begin construction, and then forget that the lender will require that the file be updated prior to funding into the permanent loan. When the house is finished, the builder will want to be paid. Ensuring that all payments and paperwork are in order as your home nears completion will likely help you avoid any unpleasant delays.