MORTGAGES
Frequently Asked Questions
How much cash will I need to purchase a new home?
Typically, there are four cost categories when financing with a mortgage.
Down Payment: This can range from as little as zero for qualified borrowers, to whatever you can afford to put down.
Closing Costs: The lender will likely impose fees for performing certain services, as will third-party service providers such as appraisers, title examiners, and closers. Depending upon your loan size, closing costs could range from 1 to 2 percent of the loan amount.
Points: Points are usually considered optional fees that are used to buy down the rate of interest. Not every loan requires you to pay points.
Pre-Paid Items: Pre-paid items include recurring costs such as interest, Real Estate Taxes, and Hazard Insurance. These fees, which are collected at the time of closing, can differ depending upon several variables such as the interest rate and the time of month you close. For a no-obligation “Good Faith Estimate” of how much cash you will need to purchase the home of your dreams, contact a Loan Officer with The Home Loan Group. Any Loan Officer will be ready to help you with this big step.
How much home can I afford?
Down Payment: The greater the down payment, the more home you will be able to afford.
Income: Lenders typically take a percentage of your qualifying, gross monthly income to arrive at a maximum housing payment that includes principal, interest, taxes, and insurance (PITI). This percentage can vary from program to program, but usually ranges from 28 percent to 33 percent of gross monthly income.
Debt: The greater your debt load, the less monthly income will be available to service the debt on your new home, the less home you can afford.
Credit: Your credit history will also help determine how much home you can afford. A low credit score tells a lender you are a higher risk. To compensate for that risk, the lender will usually charge a higher rate of interest. The reverse is also true: a higher credit score will usually afford you a market rate of interest.
Should I get pre-approved for a mortgage before I shop for a new home?
Absolutely! Getting pre-approved for your mortgage will allow you to focus on homes you know you can afford, and lets seller know you are a serious buyer who can afford the house being offered. Pre-approval helps you stand out in the event of multiple offers and gives you negotiating strength.
What is the difference between pre-qualified and pre-approved?
Pre-qualification represents a mortgage professional’s opinion, in which little information, if any, has been verified. A pre-approval is the result of verifying credit, income, and assets, and represents a decision as opposed to an opinion.
What documentation will I need when I apply for a mortgage loan?
W-2 forms for the past two years
Bank statements (showing assets to close) going back sixty days
What types of mortgages are available?
A wide array of mortgage products is available, including the following:
- Fixed Rate Mortgage: This loan offers a fixed rate of interest over the term of the loan—usually 15 or 30 years. A fixed rate means a fixed payment of principal and interest, which is desirable for long-term budgeting. This program is best when rates are low and the borrower plans to own the property for the long-term.
- Adjustable Rate Mortgage (ARM): This loan usually offers a below-market interest for a fixed time period—usually one, three, five, seven, or ten years. After then, the interest rate, along with the principal and interest payment, will adjust with the movement of the economy. This loan is best for those borrowing in a high fixed-rate environment, or for those who plan to live in their new home only a short time.
- New Construction Mortgage: This loan allows the borrower to lock in an interest for an extended period of time, usually the construction period; as completion draws near, the borrower can elect to relock if rates have improved.
- Home Equity Lines/Loans: A home equity line, or loan, can be used in combination with a suitable first mortgage to purchase a home; if you are putting down less than 20 percent of the purchase price, the home equity loan can help you avoid having to pay mortgage insurance. These loans can also be used to help manage the equity in one of the largest assets you will ever own: your home. A home equity line can be put into place when the home is purchased, or later, and the equity drawn from the line can be used to make major purchases, such as a vacation home, car, or college education.
What is an impound or escrow account?
An impound or escrow account allows you to include, with your monthly principal and interest payment, a small portion of the cost toward your Real Estate Taxes and Hazard Insurance. The lender sets these additional funds aside until the Tax or Insurance bills come due, then pays the amount due from the account. Under some programs, an impound/escrow account may be mandatory; under others, it may be optional—although you may have to pay a fee to exercise that option.
What is a lock period?
Borrowers may have the option of “locking” in an interest before the loan closes. This action protects you against rising interest rates and guarantee your rate for a certain period of time, usually ranging from 15 to 90 days. You must close during your lock period to ensure closing with that rate.
Will my loan be sold?
Your loan may or may not be sold. Mortgage loans are considered assets to the lender who services them, just like stocks or bonds, and can be bought or sold as the company deems necessary. It is not a refection of the quality of your loan or the strength of your lender. Rather, yields and maturity dates are the among the biggest considerations in such sales, which usually take place in large “blocks.”
Shopping for a Loan
Your choice of lender and type of loan will influence not only your settlement costs, but also the monthly cost of your mortgage loan. There are many types of lenders and types of loans you can choose. You may be familiar with banks, savings associations, mortgage companies and credit unions, many of which provide home mortgage loans. You may find a listing of some mortgage lenders in the yellow pages or a listing of rates in your local newspaper.
Mortgage Brokers. Some companies, known as "mortgage brokers" offer to find you a mortgage lender willing to make you a loan. A mortgage broker may operate as an independent business and may not be operating as your "agent" or representative. Your mortgage broker may be paid by the lender, you as the borrower, or both. You may wish to ask about the fees that the mortgage broker will receive for its services.
Government Programs.You may be eligible for a loan insured through the Federal Housing Administration ("FHA") or guaranteed by the Department of Veterans Affairs or similar programs operated by cities or states. These programs usually require a smaller downpayment. Ask lenders about these programs. You can get more information about these programs from the agencies that run them. (See Appendix to this Booklet.)
CLOs. Computer loan origination systems, or CLOs, are computer terminals sometimes available in real estate offices or other locations to help you sort through the various types of loans offered by different lenders. The CLO operator may charge a fee for the services the CLO offers. This fee may be paid by you or by the lender that you select.
Types of Loans. Loans can have a fixed interest rate or a variable interest rate. Fixed rate loans have the same principal and interest payments during the loan term. Variable rate loans can have any one of a number of "indexes" and "margins" which determine how and when the rate and payment amount change. If you apply for a variable rate loan, also known as an adjustable rate mortgage ("ARM"), a disclosure and booklet required by the Truth in Lending Act will further describe the ARM. Most loans can be repaid over a term of 30 years or less. Most loans have equal monthly payments. The amounts can change from time to time on an ARM depending on changes in the interest rate. Some loans have short terms and a large final payment called a "balloon." You should shop for the type of home mortgage loan terms that best suit your needs.
Interest Rate, "Points" & Other Fees. Often the price of a home mortgage loan is stated in terms of an interest rate, points, and other fees. A "point" is a fee that equals 1 percent of the loan amount. Points are usually paid to the lender, mortgage broker, or both, at the settlement or upon the completion of the escrow. Often, you can pay fewer points in exchange for a higher interest rate or more points for a lower rate. Ask your lender or mortgage broker about points and other fees.
A document called the Truth in Lending Disclosure Statement will show you the "Annual Percentage Rate" ("APR") and other payment information for the loan you have applied for. The APR takes into account not only the interest rate, but also the points, mortgage broker fees and certain other fees that you have to pay. Ask for the APR before you apply to help you shop for the loan that is best for you. Also ask if your loan will have a charge or a fee for paying all or part of the loan before payment is due ("prepayment penalty"). You may be able to negotiate the terms of the prepayment penalty.
Lender-Required Settlement Costs. Your lender may require you to obtain certain settlement services, such as a new survey, mortgage insurance or title insurance. It may also order and charge you for other settlement-related services, such as the appraisal or credit report. A lender may also charge other fees, such as fees for loan processing, document preparation, underwriting, flood certification or an application fee. You may wish to ask for an estimate of fees and settlement costs before choosing a lender. Some lenders offer "no cost" or "no point" loans but normally cover these fees or costs by charging a higher interest rate.
Comparing Loan Costs.Comparing APRs may be an effective way to shop for a loan. However, you must compare similar loan products for the same loan amount. For example, compare two 30-year fixed rate loans for $100,000. Loan A with an APR of 8.35% is less costly than Loan B with an APR of 8.65% over the loan term. However, before you decide on a loan, you should consider the up-front cash you will be required to pay for each of the two loans as well.
Another effective shopping technique is to compare identical loans with different up-front points and other fees. For example, if you are offered two 30-year fixed rate loans for $100,000 and at 8%, the monthly payments are the same, but the up-front costs are different:
Loan A - 2 points ($2,000) and lender required costs of $1800 = $3800 in costs.
Loan B - 2 1/4 points ($2250) and lender required costs of $1200 = $3450 in costs.
A comparison of the up-front costs shows Loan B requires $350 less in up-front cash than Loan A. However, your individual situation (how long you plan to stay in your house) and your tax situation (points can usually be deducted for the tax year that you purchase a house) may affect your choice of loans.
Lock-ins. "Locking in" your rate or points at the time of application or during the processing of your loan will keep the rate and/or points from changing until settlement or closing of the escrow process. Ask your lender if there is a fee to lock-in the rate and whether the fee reduces the amount you have to pay for points. Find out how long the lock-in is good, what happens if it expires, and whether the lock-in fee is refundable if your application is rejected.
Tax and Insurance Payments. Your monthly mortgage payment will be used to repay the money you borrowed plus interest. Part of your monthly payment may be deposited into an "escrow account" (also known as a "reserve" or "impound" account) so your lender or servicer can pay your real estate taxes, property insurance, mortgage insurance and/or flood insurance. Ask your lender or mortgage broker if you will be required to set up an escrow or impound account for taxes and insurance payments.
Transfer of Your Loan. While you may start the loan process with a lender or mortgage broker, you could find that after settlement another company may be collecting the payments on your loan. Collecting loan payments is often known as "servicing" the loan. Your lender or broker will disclose whether it expects to service your loan or to transfer the servicing to someone else.
Mortgage Insurance. Private mortgage insurance and government mortgage insurance protect the lender against default and enable the lender to make a loan which the lender considers a higher risk. Lenders often require mortgage insurance for loans where the downpayment is less than 20% of the sales price. You may be billed monthly, annually, by an initial lump sum, or some combination of these practices for your mortgage insurance premium. Ask your lender if mortgage insurance is required and how much it will cost. Mortgage insurance should not be confused with mortgage life, credit life or disability insurance, which are designed to pay off a mortgage in the event of the borrower's death or disability.
You may also be offered "lender paid" mortgage insurance ("LPMI"). Under LPMI plans, the lender purchases the mortgage insurance and pays the premiums to the insurer. The lender will increase your interest rate to pay for the premiums -- but LPMI may reduce your settlement costs. You cannot cancel LPMI or government mortgage insurance during the life of your loan. However, it may be possible to cancel private mortgage insurance at some point, such as when your loan balance is reduced to a certain amount. Before you commit to paying for mortgage insurance, find out the specific requirements for cancellation.
Flood Hazard Areas. Most lenders will not lend you money to buy a home in a flood hazard area unless you pay for flood insurance. Some government loan programs will not allow you to purchase a home that is located in a flood hazard area. Your lender may charge you a fee to check for flood hazards. You should be notified if flood insurance is required. If a change in flood insurance maps brings your home within a flood hazard area after your loan is made, your lender or servicer may require you to buy flood insurance at that time.
Securing Title Services
Title insurance is usually required by the lender to protect the lender against loss resulting from claims by others against your new home. In some states, attorneys offer title insurance as part of their services in examining title and providing a title opinion. The attorney's fee may include the title insurance premium. In other states, a title insurance company or title agent directly provides the title insurance.
Owner's Policy. A lender’s title insurance policy does not protect you. Similarly, the prior owner’s policy does not protect you. If you want to protect yourself from claims by others against your new home, you will need an owner's policy. When a claim does occur, it can be financially devastating to an owner who is uninsured. If you buy an owner's policy, it is usually much less expensive if you buy it at the same time and with the same insurer as the lender's policy.
Choice of Title Insurer. Under RESPA, the seller may not require you, as a condition of the sale, to purchase title insurance from any particular title company. Generally, your lender will require title insurance from a company that is acceptable to it. In most cases you can shop for and choose a company that meets the lender’s standards.
Review Initial Title Report. In many areas, a few days or weeks before the settlement or closing of the escrow, the title insurance company will issue a "Commitment to Insure" or preliminary report or "binder" containing a summary of any defects in title which have been identified by the title search, as well as any exceptions from the title insurance policy’s coverage. The commitment is usually sent to the lender for use until the title insurance policy is issued at or after the settlement. You can arrange to have a copy sent to you (or to your attorney) so that you can object if there are matters affecting the title which you did not agree to accept when you signed the agreement of sale.
Coverage & Cost Savings. To save money on title insurance, compare rates among various title insurance companies. Ask what services and limitations on coverage are provided under each policy so that you can decide whether coverage purchased at a higher rate may be better for your needs. However, in many states, title insurance premium rates are established by the state and may not be negotiable. If you are buying a home which has changed hands within the last several years, ask your title company about a "reissue rate," which would be cheaper. If you are buying a newly constructed home, make certain your title insurance covers claims by contractors. These claims are known as "mechanics’ liens" in some parts of the country.
Survey. Lenders or title insurance companies often require a survey to mark the boundaries of the property. A survey is a drawing of the property showing the perimeter boundaries and marking the location of the house and other improvements. You may be able to avoid the cost of a complete survey if you can locate the person who previously surveyed the property and request an update. Check with your lender or title insurance company on whether an updated survey is acceptable.
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