Questions & Answers
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We've compiled a list of common questions we've encountered in the loan application and home buying experience. If you have any other questions of your own, please contact us today.
Mortgage insurance, also referred to as MI, is paid monthly with a borrower’s mortgage payment. It protects lenders against taking a financial loss if the borrower stops making payments. Mortgage insurance is required on mortgage programs that require little or no down payment and the lender's exposure is greater than 80% of the purchase price or appraised value, whichever is less.
Mortgage insurance can be avoided by utilizing loan programs such as an 80/20, in which a 1st mortgage (80% LTV) and 2nd mortgage (20% LTV) are taken on the property. No down payment is required. Or, there is Lender Paid Mortgage Insurance (LPMI). With this option, the lender pays the mortgage insurance, which is offset by a higher interest rate charged to the borrower.
An escrow account is set up by the lender to collect monthly payments for property taxes, homeowner’s insurance and possibly other items in addition to a borrower’s mortgage payment. The lender then pays these bills on the borrower’s behalf when payment is due.
Escrow accounts can be avoided when the borrower has at least 20% equity in the property or the loan to value (LTV) is less than 80%.
Pre-qualification is a lender's judgment of your ability to make payments on your mortgage, based on your verbal statement of income, assets and employment history. Pre-approval is the underwriting decision that you are conditionally qualified and is subject to the lender's review of your completed application, verification of your income, assets, employment history, credit check, appraisal and other determining factors.
Adjusted Rate Mortgages (ARM) are variable interest rate loans – interest rates that change monthly depending on market conditions. Rates are determined by adding a margin to an index on a specific date. There are different ARM options, such as 5 or 7 years.
This is the process of determining whether a customer has enough cash and sufficient income to meet the qualification requirements set by the lender on a requested loan. A pre-qualification is subject to verification of the information provided by the applicant. A pre-qualification is short of approval, because it does not take account of the borrower's credit history.
It is an upfront cash payment required by the lender as part of the charge for the loan, expressed as a percentage of the loan amount; e.g., "2 points" means a charge equal to 2% of the loan balance.
A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, currently $453,100.
A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac. The loan limits are currently $453,100 for a single-family house.
It is the list of settlement charges that the lender is obliged to provide the borrower within three business days of receiving the loan application.
High-Balance Conforming: The Housing and Economic Recovery Act of 2008 (ARRA) changed Fannie Mae’s charter to expand the definition of the “conforming” loan. Effective with the November, 2008 release of the conforming loan limits, two sets of limits are provided for first mortgages: 1) general conforming loan limits, and 2) high-cost area conforming loan limits. To implement the expansion to serve high-cost areas, Fannie Mae offers the high-balance loan feature, which is broadly applied across their standard conforming business. Pursuant to the American Recovery and Reinvestment Act, loans originated since 2009 may be delivered to Fannie Mae using the higher of 10 the permanent high-cost area loan limits, or 2) the temporary high-cost area loan limits in place for loans originated in 2008.
USDA Rural Development: This program is administered by USDA Rural Development, which serves the public through more than 800 field offices nationwide. Sometimes good credit and steady income are not enough to qualify for a home loan at a commercial lending institution, such as a bank or savings and loan. More rural families and individuals may be eligible to become homeowners with the help of a USDA guaranteed home loan. When the federal government agrees to guarantee a loan, lending institutions can help buyers while incurring less risk. Through USDA’s Guaranteed Rural Housing Loan Program, low- and moderate-income people can qualify for mortgages even without a downpayment.
Both income and assets are disclosed and verified, and income is used in determining the applicant's ability to repay the mortgage. Formal verification requires the borrower's employer to verify employment and the borrower's bank to verify deposits. Alternative documentation, designed to save time, accepts copies of the borrower's original bank statements, W-2s and paycheck stubs.
A mortgage broker counsels you on the loans available from different wholesalers, takes your application and usually processes the loan, which involves putting together the complete file of information about your transaction, including the credit report, appraisal, verification of your employment and assets and so on. When the file is complete, but sometimes sooner, the lender "underwrites" the loan, which means deciding whether or not you are an acceptable risk.
A rate lock is a contractual agreement between the lender and buyer. There are four components to a rate lock: loan program, interest rate, points and the length of the lock.
Usually, people refinance to save money, either by obtaining a lower interest rate or by reducing the term of the loan. Refinancing is also a way to convert an adjustable loan to a fixed loan or to consolidate debts. The decision to refinance can be difficult, since there are several reasons to refinance. However, if you are looking to save money, try this calculation:
- Calculate the total cost of the refinance
- Calculate the monthly savings
- Divide the total cost of the refinance (#1) by the monthly savings (#2). This is the "break even" time. If you own the house longer than this, you will save money by refinancing.
Since refinancing is a complex topic, consult a mortgage professional.