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mortgage pre-approval and process
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When applying for your pre-approval your mortgage professional can help you determine the most appropriate product based on the goals you've shared. Ask these questions:
- How long do I plan on living in this home?
- Once I move, will I sell the home or keep it as an investment?
Remember, mortgages are financial tools, not bragging rights. If you focus on the rate alone, you may not put yourself on the best financial track to meet your own objectives, so be honest with yourself when answering these questions.
Understanding the basic mechanics of fixed and adjustable rate mortgages (ARM) is key when trying to make a decision about which product will work best for you.
Let's briefly review the difference between the two—then you'll be ready to make your decisions.
Fixed rate mortgages are the most stable of the options—the rate is fixed for the term of the loan. There are many options regarding the length of fixed-rate-mortage, such as 10, 15, 20, 25 or 30 years (the most common being 15 and 30 years). For example, a 10 year fixed rate loan is amortized over 10 years or 120 months. The loan will be paid in full by the end of the term of the loan.
If you are considering a shorter term simply because of a lower rate, remember, you can always make an additional payment throughout the year which can reduce your mortgage term by 5 to 7 years.
Adjustable Rate Mortage (ARM)
When used properly, good financial tools. Before deciding on an ARM product it's prudent you understand how ARM rates move.
Adjustable rate mortgages have interest rates and monthly payments that change based on the index the rate is tied to (LIBOR being the most common). Many ARMs will have a fixed rate during the initial fixed period, then begin to adjust once that period expires.
Once your fixed period expires, your rate will begin to adjust; in an effort to keep the rate from climbing too high, the lender offers rate adjustment caps.
- Initial cap – This cap prevents the rate from adjusting more than the stated percentage for the first year.
- Periodic Cap – This cap prevents the rate from adjusting more than the stated percentage during each adjustment period.
- Lifetime Cap – This cap prevents the rate from adjusting more than the stated percentage for the life of the loan.
If you've chosen an adjustable rate mortgage you'll need to speak with your mortgage professional about the most appropriate ARM for your financial goals.
How long do I plan on living in this home?
If you are purchasing a starter home, the average amount of time you might expect to spend there is 5-7 years; however, if you're unsure, keep in mind that 5–7 years can fly by, and you might not be ready to move at that time. In that case, a fixed rate might be the best option since it offers flexibility of options. For example, if after seven years you would like to remain in the home you will not incur the cost of a refinance (out of your adjustable rate loan) or be subject to possibly higher rates.
Once I move, will I sell the home or keep it as an investment?
You should consider whether you'll want to keep the home when you're ready to move or not. Fixed rates will allow you to keep the same payment until you are ready to sell, if ever.
When considering your options you should always speak with your mortgage professional for all of the details related to available mortgage products.
Mortgage Loan Programs
There are many types of mortgage loan programs available, and it can become overwhelming when trying to decide which program will meet your financial needs. Before determining which loan program is right for you, you'll need to ask yourself:
- Will I need a jumbo or conforming loan?
- How much can I put down?
- Will I qualify for other loan programs?
Be realistic when answering these questions; these are your financial goals and your answers will help point you the direction of the type of program you'll need.
Will I need a jumbo or conforming loan?
Answering this question will be easy if you are clear on the difference between a conforming and jumbo loan.
Jumbo Loans: Loans with a loan amount that exceed Fannie Mae and Freddie Mac's maximum loan amounts.
Learn more about the loan limits in your area. While this site offers Fannie Mae loan limits, both Fannie and Freddie rarely run independent of one another.
How much can I put down?
This is an important question and your answer will help narrow down your program eligibility. For example, if you will put down less than 5 percent then FHA will be your best option; however, if you have 5 percent or more, you can take advantage of the Fannie Mae and Freddie Mac loan options.
When determining how much savings you have for your down payment, don't forget to include closing cost calculations. You'll need to speak with your mortgage professional regarding an estimated itemized list of closing costs—this is also known as your Good Faith Estimate.
Will I qualify for other loan programs?
There are several loan programs you might qualify for and speaking with your mortgage professional about all of your options will yield the best results.
Let's briefly review some more popular loan programs available:
FHA loans are insured by the federal government. These types of mortgages offer flexible lending terms such as low down payment and reduced credit score requirements. While every FHA loan requires mortgage insurance, regardless of your down payment amount, it's still a great option when you are limited by either challenged credit or little savings.Other FHA loans include:
- Streamline Refinance
- – This refinance program is offered to those who owe more than the value of the home. Exceptions have been made by FHA to eliminate the worry of low value.
- Full 203k
- – This is FHA's construction loan. Repairs must exceed $35,000 and the program allows for many improvements from large remodeling projects to a complete rebuild of a home.
- Streamline 203k
- – This is FHA's limited construction loan. Repairs for the Streamline cannot exceed $35,000 and the program allows for a variety of home improvements from new kitchens and/or baths to elimination of health and safety hazards.
If you are a United States armed forces veteran then you are more than likely eligible for a VA home loan. Mortgage lending for veterans is flexible with no minimum credit, no down payment and no mortgage insurance. The VA does charge a funding fee for every loan; however, there are exceptions to the rules and the funding fee will vary from the type of mortgage transaction to the amount of your down payment.
The Department of Agriculture aims to improve the quality of life for rural areas. In support of this effort, they offer 100 percent financing with flexible credit requirements for those who prefer to live in a rural community.
Construction loans are used when you are interested in building a home from the ground up. Lenders will require at least 20 percent down with credit scores over 700. Building a new home can be exciting yet, it will require your involvement to ensure your expectations are being met.
Second mortgages are great financial tools when used properly. When accessing your equity you should be clear on your financial goals for using your equity (e.g., paying for your child's college tuition or investing in more real estate).
Lenders have strict guidelines about the approval process and they are primarily driven by credit scores and the amount of equity in your home. A lender will typically require a minimum credit score of 700 and loan-to-value limit (what you owe versus your home's value) of 80 percent—some lenders will allow up to 90 percent.
For more information about additional programs or general mortgage questions, contact one of our Mortgage Dream Team members today.
Buying a home can be both exhilarating and stressful; however, if the correct steps are taken, you can experience a very smooth transition from renter to home owner.
A mortgage loan pre-approval is a crucial part of shopping for a home and it's wise to speak with a mortgage professional prior to simply shopping for your dream home. A pre-approval will allow you to shop with the confidence that you'll have financing when it's time to submit an offer.
There are many benefits to obtaining pre-approval, some of which include:
- You'll be clear about how much you can afford and shop within your price range.
- Your offers will be taken seriously by sellers.
- You'll have an advantage over buyers who are not pre-approved.
- You'll determine whether you should consider conforming or jumbo financing.
The process is fairly simple, as all of the documentation you'll need will most likely be saved electronically or accessible online. For the sake of being thorough it's best you provide your mortgage professional with as much documentation as possible. Some of the documents include:
- Two most recent paystubs.
- Two most recent federal tax returns.
- If self-employed, two most recent business returns.
- All asset statements—two most recent months for all checking, savings, 401k, IRA, stocks, bonds etc. You'll need to provide all numbered pages—even if they are blank.
- Authorization to pull credit—This can be an email authorizing the credit inquiry or you can pull your own credit.
- Contact information for your human resources representative.
If you would like to help move your approval process along, check out our comprehensive list of documents you'll need when applying for a mortgage.
Have more questions? Check out our list of important questions to ask your lender.
What financial information do I need to provide?
Mortgage loan applications are extremely detailed. In addition to asking you specific questions, a lender will ask you to produce records detailing your fiscal activities. These records should include items such as monthly earnings, monthly expenditures, debts, and investments. You will need to show past W2 forms and your current pay stubs for the year.
Also, you will have to disclose your current debt. You will need to include all outstanding debt as well as provide the lender with your account numbers and the addresses of the creditors. In addition to all this, you will need the purchase contract for your new home. If you have too much debt, you might be turned down for a loan.
There are many factors involved in a mortgage. Usually you will be notified of your status within 30 days of completing your loan application. If the situation is exceptionally difficult, it might take a while longer to get a decision. Check with your lender to see how long your application is expected to take. You don't want to jump the gun and start viewing homes only to find out you didn't get the loan.
Check your credit report before you talk to a lender. If there are any discrepancies it's best to catch (and fix) them before going to a lender. Your credit report will have a strong bearing on your application acceptance process. If your files show that you have poor credit, the rest of your financial standings might not matter. You are allowed by law to know what's in your credit report. If you are unsure about anything in your credit report ask someone from the credit bureau to explain it to you.
How Will My Monthly Payments be Calculated?
By looking at your personal economic condition and getting an estimated property value, a lender determines how much you can actually borrow. The lender will review your financial standing while a Chicago home appraiser determines the property's value. The estimated property value can heavily influence the amount you are allowed to borrow.
It is common to receive between 80%-90% of the estimated property value. The remaining amount is covered by the buyer's down payment. This is why most down payments fall around the 20% range. Sometimes the appraisal ends up being lower than the home's current price in which case the loan and the down payment won't be large enough to buy the home. When this happens, a lender may call for the buyer to provide a greater amount in the form of a down payment. This is to reduce the discrepancy between the appraised value and the asking price on the property.
Be in the Know
There's going to be a lot of terms and numbers being thrown at you during the home buying process. You're not going to know what all of them mean, so make sure you ask about anything that's unclear. In the loan process, a lender might give you figures like "28 and 36". What do these numbers mean?
"28 and 36 " are ratios that are close to the ones a lender will quote you. They well help you predict your mortgage payment and existing debt.
"28" represents the amount you can spend on a home. Before taxes, you can spend 28% of your total income on real estate tax, the mortgage, and insurance.
"36" represents the amount you can spend on all your debts. This figure includes your mortgage as well as any other debts you have incurred. With all of your payments added up, the total should not be more than 36% of your total income.
Lender ratios will vary. "28 and 36" are common, but not necessarily used by everyone. Ask your lender what their ratios are. You can save some time if you know ahead of time that you will not meet a certain lender's requirements.
If your application is denied, under federal law the lender is required to cite, in writing the precise reasons your loan was turned down. This information can be vital when applying for another loan. Make sure you understand all the reasons that your application was denied. See if there is anything you can do to meet the lender's criteria. If not, at least you are aware of the problems and can address them before you meet with another lender.
Some Factors Crucial To Your Loan's Approval
Did payment issues arise due to poor credit history or large amounts of debt? See how you compare to the lender's criteria. Were there any unique circumstances regarding you past credit troubles? Ask for a chance to explain.
Make sure you get an accurate appraisal. If the home is undervalued, you might have tried to secure a loan that is larger than you need. If this is the case, it would be a good idea to ask the lender to re-inspect the appraisal. Check the prices that similar homes in the area sold for. If you paid for the appraisal, you are entitled to receive a copy of it.
Do you have enough for the required down payment? If you don't have enough, check with your lender to see what other types of mortgages they offer. They might have an option that allows you to lower the amount of the down payment.
Abstract of Judgment - Legal document indicating the amount of money the losing party in a lawsuit has been ordered to repay. If properly filed with the County Recorder's Office in the geographical area in which the said property is situated, the document serves to place a lien against the property in question.
Accelerated depreciation - Accounting practice by which a property owner can legally subtract a sizable portion of a property, whose value has dramatically depreciated within a short time period after it having been purchased.
Acquisition indebtedness - Loan taken out by a property owner in an effort to build, buy, or significantly improve a home. In most instances, the money borrowed for these purposes is considered to be a tax-free loan.
Adjustment period - Pertaining to Adjustable Rate Mortgages (ARM) the term refers to the leveled-off, interim periods that occur in between fluctuations in the rise and fall of interest rates.
Agreed Boundary - Reference to land use parameters established in an effort to resolve a disagreement among bordering owners of property.
Back title letter - Official document describing the sale terms and ownership pertaining to a specified property. Produced by a title insurance company, this becomes the property of either a buyer or seller's attorney upon the sale of the said property.
Balloon mortgage - Type of mortgage home loan structured whereby the borrower makes consistently regular payments up until the end of the term when a sizably large final payment (balloon payment) comes due in conjunction with the loan's maturity date.
Balloon payment - Within the mortgage loan arena, this term is used to identify a payment made that is significantly larger in size than any of the previous payments. Typically, this is a lump sum payment used to pay off any remaining balance that exists.
Bilateral contract - An agreement of sale under which the two promises are made: 1) the buyer will provide currency, and 2) the seller will transfer the deed to a said property.
Blanket mortgage - More commonly associated with commercial real estate dealings, this type of loan is generally secured to covered multiple structures.
Biweekly mortgage - Type of loan whereby borrowers are required to make payments twice a month, as opposed to once a month. Though each of the 26 payments is equal to half of the traditional monthly charge, the borrower still ends up paying a substantially lower amount overall on account of a reduction in accrued interest fees.
Capital gains - The amount gained by an owner in the sale of property or other valuable assets.
Capitalization - A useful technique by which one reviews the rate of return and the property's annual income (net as opposed to gross) in an effort to approximate the perceived market value of a particular commercial or rental structure.
Certificate of title - Drafted by either a lawyer or a title company; legal document affirming that the present owner of a said property is indeed the person who has the authoritative right to ownership over that asset.
Closing costs - Various obligatory charges, such as lending, title, government recording, and escrow fees, assumed by purchasers and sellers in the process of buying and/or selling property.
Collateral - Property used to financially back a debt. Should the borrower not meet his/her financial obligations to make necessary payment, the lender has the authority and power to sell the property in an effort to recoup money owed.
Compound Interest - Interest determined by first establishing the rate of interest for the current period, adding that figure to the original principal, and then calculating the interest for the next period by using this new adjusted amount in place of the original principal.
Contiguous lots - Parcels of land that are adjacent to one another.
Contingent fee - Payment made only if a certain event happens.
Contractual lien - As an outgrowth of a voluntary agreement, a temporary, legally-binding penalty placed against a property. Often a mortgage is cited as the cause of a contractual lien.
Conventional mortgage - Terms usually used to indicate a fixed-rate, 30-year mortgage not associated with the Veteran's Administration, Federal Housing Authority, or Farmers Home Administration (FmHA).
Convertible ARM - An adjustable rate mortgage (ARM) which can be transformed into a fixed-rate mortgage, given that certain conditions are met.
Credit repository - Former, out-of-date term used in reference to a credit reporting agency.
Debt-to-income ratio - Upon calculation, this figure is often used to determine one's credit worthiness. To determine, one needs to assess the percentage of his/her gross income used to cover outstanding loan/credit payments in contrast with the amount of his/her net income.
Default - Status yielded when a borrower or renter neglects to meet his/her duties as outlined within the lease or mortgage documents. Most common contributors include: failure to make regular, consistent payments and misrepresentation of one's financial worth | background.
Demand Deposit - Within the financial industry, this term is applied to money that can be immediately withdrawn sans prior notice. The checking account is often cited as a prime example of demand deposit.
Delinquent Mortgage - Failure by the individual who has borrowed money on a home loan to make regular, consistent payments.
Distressed Property - Property that is either in a dilapidated physical condition or is owned by an individual who is undergoing a period of economical instability.
Eminent Domain - The government's authoritative right to seize privately owned property and turn it into a public use area. However, as part of this action, the government must offer just compensation of the property's market value to the owner.
Encumbrance - Any financial penalty pending against the value of a property. Specific varieties include: liability, lien and/or charge.
End loan - Term used to define the last mortgage on a property, as opposed to either a temporary loan for refurbishment or a midpoint loan.
Equity - The portion of the value of the home owned outright by the owner. Hence, this is the dollar figure, calculated by subtracting any outstanding moneys owed (mortgage balance due) from the present market rate of the home, the homeowner has paid for up until a specified date. So long as mortgage payments continue to be met and the value of the home is maintained, equity, over time, generally grows.
Escrow - Account, held by a third party, in which all pertinent materials, currency and paperwork are held until the sale is officially confirmed. After the sale goes through, the funds remains in place as a place in which to deposit additional funds to cover regular mortgage payments, property taxes, homeowners' insurance and incidentals.
Examination of title - A search of public records and title documents to uncover the name of the person who previously owned a particular property.
Exclusive listing - Official contract entitling a single real estate agent, sole rights to sell a particular property within a pre-set period. The single exception to this contract is the instance in which the property owner opts to show/sell the property on his/her own, without obligation to remit any percentage of the sale to the agent.
Experian - Among the leading trio of U.S. credit bureaus/Experian shares this prominence with Equifax and Trans Union.
Fair Credit Reporting Act - National doctrine by which credit reports must adhere, it outlines the basic guidelines by which credit bureaus can report information in a consumer's file. Specifically, it stipulaties the type and the duration of time for which they may relay information within the confines of an authorized credit report check.
Federal Funds Rate - Cost of lending employed by depository institutions, such as banks, when they are loaning out money to one another. Most commonly this practice occurs in conjunction with overnight lending. Federally mandated to keep a certain percentage of clients' money on hand, financial lending institutions—though they draw no interest on this prudent reserve—try and stay as close to this prescribed amount as possible.
Federal Home Loan Mortgage Corporation - (FHLMC or commonly known as Freddie Mac) FHLMC, an organization sponsored by the U.S. government, purchases home mortgages from savings and loan associations, groups the mortgages with other loans, and persuades investors to purchase the debt.
FHA loan - A home mortgage supervised by the Federal Housing Administration. This sort of loan is given by a lender approved by the Federal Housing Administration. In most instances, the down payment associated with an FHA loan is lower than that of traditional loans. The loan is not actually given by the Federal Housing Administration; rather, the administration works in tandem with lenders to insure the mortgages promised.
Fiduciary duty - A professional responsibility to act truthfully and with good faith in representing a client. In their lines of work, title agents, bankers, and real estate agents all assume this responsibility.
First lien - The initial claim made by a lender to satisfy an unpaid debt. One example is a first mortgage.
Fixed installment - Regular, generally monthly, payments made towards paying off a loan. The mark of distinction is that these payments never waiver—rather they are set a fixed rate in terms of payment amounts.
Fixed-rate mortgage - A residential loan with a set rate of interest. The rate of interest remains constant throughout the duration of the loan.
Forbearance - A postponement of foreclosure commonly occurs because the borrower has made arrangements to pay the overdue amount.
Foreclosure - Legal procedure during which property is sold to pay off the mortgage of a defaulting borrower. As a result, the borrower is deprived of earning any interest on the property or other funds associated with ownership of the home when sold at public auction.
Full market value (also commonly called full cash value) - When discussing property taxes, this term refers to the current market taxation rate that applies to 100 percent of a home's value.
Fully amortized adjustable-rate mortgage - Type of home loan that carries with it a changeable rate of interest that must be fully paid off by the policyholder at the end of the term.
Government National Mortgage Association (also called Ginnie Mae) - Federal program that guarantees timely payment of mortgage backed-securities by either the federal government r such guaranteed loans as Federal Housing Authority (FHA) loans. Mortgage Backed securities are grouped Together mortgages used as collateral for the issuance of secondary market securities. Ginnie Mae issues no loans itself. Ginnie Mae operates within the federal Department of Housing and Urban Development (HUD).
Graduated-payment mortgage (GPM) - Type of residential home loan whereby payments begin low, and gradually increase over time until they eventually reach a plateau and level out to a fixed payment rate.
Growing-equity mortgage (GEM) - Type of home loan whereby, even though a fixed rate of interest is locked-in, payments still, gradually, increase as time goes by. The advantage of this type of loan is that it allows for funds borrowed to be paid back in a shorter period of time, the average being 15 years.
Guaranteed mortgage - A loan guaranteed by a federal government department, such as the Veteran's Administration, or by a non-government corporation, group, or individual. The guarantee protects the lender if the borrower defaults.
Home equity - The unencumbered value of an owner's home. Equity is calculated by subtracting any liens and unpaid mortgage principal from the fair market value of the home. Equity increases as loans are paid down and the home increases in value.
Home Ownership and Equity Protection Act - National law passed to encourage fair and equitable distribution of mortgage and home equity loans among persons of all races, religions and geographical origins.
Housing expense ratio (or front end ratio) - This is the portion of before-tax income used to purchase a house. As a general rule, this portion should not go above 28 percent of one's total take gross take home income.
Index - The interest rate on an Adjustable Rate Mortgage (ARM) is tied to an index, or published interest rate, which is not controlled by the mortgage lender. The interest rate and its connecting index may fluctuate. Other variable rate loans, such as credit card debt, are also connected to indexes.
Insurable title - Homeowner property deed (title) for which a title company agrees to provide coverage.
Interest rate - The yearly sum charged on a loan. Different types of loans have different rates.
Interest rate cap - A boundary or limit on much an interest rate may increase or decrease at rate adjustment periods and throughout the loan term.
Joint credit - Credit issued to a couple taking into account their combined credit histories, assets, and incomes. Both people become responsible for the debt and usually a greater amount of credit is extended.
Late payment - Payment made by the borrower to the lender that arrives after the scheduled remittance date.
Lease-purchase mortgage - Opportunity extended to a tenant to rent a home with the option of future purchase. Generally, the regular rental payments are put towards covering the initial mortgage payment, as well as, a sum towards the down payment.
Lien - A claim against property for unpaid debts or services. A lien holder may sell the property to recoup funds or recover them after the property is sold to another individual. For validity purposes, this official document must be kept on record with the County Recorder.
Life cap - Over the duration of the loan, this limit dictates how much the percentage rate can vary.
Life-cycle cost analysis - For the longevity of a property, a technique for determining the total expected upkeep and operating costs.
Lis pendens - Notice that a lawsuit involving property has been filed.
Loan application - Within the confines of this formal document, when applying for a loan, a potential borrower is required to outline his/her financial situation in great detail.
Loan application fee - An amount charged by a lender to review a loan application submitted by a potential homebuyer.
Loan-to-value ratio (LTV) - The portion of home's value purchased via the employment of a mortgage. For example, if a homeowner purchases a house for $100,000 and takes out a mortgage for $70,000, then the loan-to-value ratio is 70 percent. In the event of refinancing, this ratio is assessed based upon the appraised value of the property, rather than the original purchase price.
Low-down mortgages - Types of mortgages requiring very low down payments, in most cases, lower than 10 percent. Federal loans, such as Fannie Mae's Flexible 97 and Freddie Mac's Alt 97 are examples of low-down mortgages that require borrowers only make only a 3% down payment towards the purchase price of a new home.
Low-down-payment loan - A type of loan in which the borrower makes a nominal down payment and, in turn, takes out a loan to cover the large remaining portion of the purchase price of the new home.
Maturity - The day on which the remaining principal must be paid.
Maximum financing - When the borrower makes the smallest acceptable payment amounts to the loan originator. Subsequently, these types of loans are subject to maximum financing in terms of interest rates and length of loan terms.
Monthly Treasury Average (1 year) - A measuring chart based upon the cumulative 30-day average of one-year Treasury Bills.
Mortgage - An official document that states if the borrower were to cease making payments on the home loan, the lender would have the legal right to take ownership over the property.
Mortgage insurance - Sometimes called MI or PMI, these types of policies safeguard the lender who otherwise would be not covered should there be a foreclosure on the property or the borrower ceases to make regular payments on the principal they owe under their mortgage.
Mortgage Refinance - Situation whereby a borrower acquires a new loan/mortgage in order to cover an existing one. Reasons why borrowers take this step is to reduce their interests rates and/or liquidate cash from their home equity.
Multiple Listing Service (MLS) - The Board of Realtors® generates this database that includes all for sale properties in a given geographical area. The service also lists properties for lease, but does not include homes put up for sale by the actual owner.
Negative Amortization - A loan in which your principlal balance—the amount you owe— increases every month. This occurs due to the fact that monthly payments are not sufficient to cover the interest due on the loan. The amount missing to cover the interest is then added to the principal balance. The benefit of a negative amortization loan is that a buyer can afford to buy a higher priced property with a lower monthly payment. Buyers typically choose this loan for short term, or assuming significant appreciation in value. The disadvantage is that you will owe more than you borrowed, and your loan amount may exceed the property's value at some point.
No cash-out refinance - A mortgage that carries with it an interest rate lower than the costs incurred from the property's closing and the starting principal amount of the loan.
Note - A written promise to pay. Also called a promissory note.
One-year adjustable mortgage - A property loan under which the rates change every year. Rates determined by the lender are hinged upon several factors including the public index figures and established margin rates.
Original principal balance - Actual amount loaned to the prospective homebuyer.
Owner financing - Situation in which the owner of a property lends the buyer either a portion of the entire sum of the property's agreed upon purchase price.
Per-diem interest - This form of interest is charged on a 24-hour basis. Typically, the borrower pays these fees when he/she has purchased property in the middle of the month and charges need to be assessed for the interim period in-between monthly time frames. Interest in this sense is determined starting from the closing to the start of the next month.
PMI (Private mortgage insurance) - Type of mortgage policy by which the lender is safeguarded against a borrower in the event he/she neglect sto make necessary payments. Included under a PMI are fees associated with foreclosures. In most instances, the lender requires this type of insurance be purchased whenever the amount of the down payment falls short of equaling 20 percent of the purchase price.
Prime for life - A highly appealing loan because of the fact the interest remains at the same fixed rate for the entire span of the policy.
Qualifying ratios - Lenders calculate these percentages to determine if a borrower qualifies for a mortgage. Lenders examine the percent age of a potential borrower's before-tax income used to pay loans compared to his or her income. Two ratios are considered: 1), the percent age of monthly before-tax income used to make house payments (principal, interest, taxes, insurance), and 2), the amount spent on other loans such as auto loans, student loans, and credit card debts. The first ratio is called the "front-end ratio" and the second is the "back-end ratio."
Rate-improvement mortgage - A loan permitting a borrower to reduce his or her interest rate once without paying refinance charges.
Refinancing - The act of taking out a second mortgage in order to cover payments on a first mortgage. Most often, the purpose for which homeowners undertake such an action is to derive interest rates that are lower than under the original mortgage or to convert equity in the home into quick money.
Rehabilitation mortgage or rehab mortgage - A process by which a homeowner/property owner borrows money for the purchase, rehabilitation, and/or upgrading of a home or building.
REIT (Real Estate Investment Trust) - These funding sources invest primarily in property and mortgages and then make investors responsible for money either earned via income or lost via taxes or falling property rates.
Reverse mortgage - A loan giving a senior homeowner the ability to change home equity into cash. Usually no payments are due until the senior moves, passes away, or the home is sold. The loan is due when the senior dies, moves, or sells. The final payment is calculated to not exceed the home's selling price.
Right of rescission - Provision to a borrower to cancel a loan within three days of entering into the agreement. Provision is part of the federal Truth-in-Lending Act.
Second mortgage - Loan that is considered to be adjunct to the first or original mortgage. This loan is secured by the equity of the property.
Secured debt - Term used to describe a debt, such as a mortgage loan, that is backed by a lien against a borrower's property. If the debt is not repaid, the lender may sell the property to recover the money owed.
Secured loan - Type of arrangement in which borrower has some form of backing, such as collateral equal in value to the amount of money he/she is borrowing.
Shared-appreciation mortgage - A specific type of loan in which the lender offers the borrower an interest rate that is below market levels in agreement for a portion of the profits generated from the sale of the home.
Simple interest loan - For the policy holder, this is a method by which the payments between the principal and interest can be viewed as two separate entities. To calculate the interest owed, one takes into consideration the principal balance, time since the last payment was made and the current interest rate. The remaining balance of the monthly payment goes toward paying off the principal. Financial experts always recommend policy holders pay early and increase the amount of their payments to in avoid paying additional interest charges over the duration period of the loan.
Step-rate mortgage - A type of home loan, in which the rates remain fixed, with the policy holder's payments beginning at a small amount and gradually increasing over time.
Sub prime mortgage - A loan to a borrower with poor credit. Because the borrower is considered sub prime, lenders charge a greater interest rate to make up for possible default on the loan.
Tax shelter - An investment method by which the principal owner is able to pay either a reduced amount of taxes or none at all on the money set aside in reserve. Note: The IRS monitors such money investment vehicles quite strictly in an effort to weed out those attempting to commit fraud or tax evasion.
Title - Exclusive ownership of property. Title, the right of ownership, is recorded in a deed. A deed is a legal document.
Title insurance - A policy certifying an owner has the title to a house and the right to transfer it to another.
Trading down - Act of a homeowner selling a home considered to be of a greater value in exchange for purchase of a home considered to be of lower worth.
Trading Up - Act of a homeowner selling a home considered to be of lower value in exchange for the purchase of a home considered to be of greater worth.
Treasury bill or Treasury note - U.S. government Issued securities. The variation in the interest rate on these securities is often used as the Rate Index for Variable-rate or Adjustable Rate Mortgages (ARM).
Truth-in-Lending Act - A federal law mandating that credit terms must be given to the borrower in a standard format to aid the borrower in comparing lenders' terms.
Two-step mortgage - Type of loan in which the interest is at a set rate for the first 5-7 years of the loan and then, for the duration of the loan, switches to a different rate.
Underwriting - The method a lender uses to determine its risk in making a loan. Underwriting involves evaluating the quality of the borrower (creditWorthiness) and the property.
Unsecured loan - Type of arrangement in which borrower has no form of backing or collateral to put forth in exchange for the money he/she is borrowing.
Usurious rate - An excessively high rate of interest in which the borrower may be being charged over the legal amount.
Variable-rate mortgage (also known as Adjustable Rate Mortgage or ARM - A mortgage for which the interest rate is tied to an index, or published interest rate, which is not controlled by the mortgage lender. The interest rate and its connecting index may fluctuate.
Voluntary lien - Term used to describe a legally backed action taken against a property owner in an effort to collect an unpaid debt.
Wall Street Journal prime rate - After surveying banking institutions, the Wall Street Journal publishes this median figure indicative of average lending rates.
Wraparound mortgage - A form of refinanced loan in which all of one's previous mortgage-related debts are pooled into one lump loan agreement.
12 Important Questions to Ask Your Lender
12 Important Questions to Ask Your Lender
Before choosing a lender, you should interview a few different options. Your agent can give you names and contact numbers of lenders they recommend, or you can ask your friends and family for referrals.
Here’s a list of questions to ask when meeting with a lender:
What’s the best type of home loan for me?
There are several different types of loans available to borrowers today. Your lender can help you decide which is best for your financial situation. But they cannot do this without first learning about you. A lender should collect information about your finances, credit score, debt-to-income ratio, and ask you about any changes that may impact your future spending power (e.g, upcoming job promotion, new car payments, college tuition, anticipated additional expenses, etc). You want a lender that takes the time to make a valid loan recommendation based on your specific monetary capabilities. Learn about mortgage loan options here.
What do you know about current incentives?
There are several national and local home buyer incentive programs that you may qualify for. Some are temporary, and others are always offered. In some cases, credits may be given for purchasing in redeveloping or mixed-income areas. Opportunities like these can save you a substantial amount of money. You want to make sure your lender is familiar with available programs and can assist you in benefiting from their incentives.
What are the interest rate and APR (annual percentage rate)?
For a fixed-rate loan, the interest rate is the percentage you pay on your principal balance each month and the annual percentage rate is a calculation of the interest rate plus assorted lender fees divided by the term of the home loan. You want to look at the difference between the two numbers. The typical difference (for a loan with no points) is 0.5 or less. A larger variance may mean you are overpaying for the mortgage, and if the interest rate and APR are the same you’re looking at too high an interest rate. These rates can be compared between lenders to see who is offering you the best option.
What costs are associated with the loan?
The Good Faith Estimate is an approximation of all lender and third-party fees plus additional closing costs. It itemizes everything you will have to pay at closing so you know how much is going toward each article. It may include fees for the credit report, appraisal, title policy, recording, title insurance, attorney services, notary, tax stamps, loan origination; prepaid taxes, interest and insurance; and the down payment. The Good Faith Estimate can help you compare loan costs between various lenders.
What are my options for discount points?
A discount point is equal to 1% of your loan amount and is used to “buy down” the interest rate, which lowers your monthly payment. If you have a mortgage for $100,000, a point would cost $1,000. Ask your lender how much you could decrease your monthly loan payment with points and calculate whether it would be a cost savings in respect to the amount of time you’ll be in your home. Points tend to be a better deal for those who plan on staying in their home for over five years, don’t plan on refinancing anytime soon, and/or want to keep the home as an investment property after moving.
Can you lock in rates for me?
Many lenders offer loan rate locks where they can “lock in” an interest rate before you actually obtain the mortgage in order to secure a lower rate. This is common practice when rates seem like they might move back up. More often than not, you will not be charged for a 30-day loan lock, but it is best to ask your lender if there is a fee. Find out how long the loan lock is good for and whether it protects all loan costs. Also, request that the locked-in interest rate be put in writing.
Is there a prepayment penalty if I pay off the loan early?
This is very important to know because you may end up selling or refinancing your home before paying the entirety of your mortgage, in which case you could be subject to prepayment penalties. There are two kinds of prepayment penalties. One charges a penalty for refinancing but not for selling; and in the other scenario you get charged for both refinancing and/or selling your home. Typically, the prepayment penalty is equal to six months of interest, however this could vary from lender to lender. Many lenders do not include prepayment penalties. But if yours does, find out beforehand what the terms are and how much you would have to dole out. Usually, it is recommended that you do not get a loan with a prepayment penalty.
Do you handle FHA loans?
A lender must be FHA-approved in order to provide FHA home loans. If you are interested in getting an FHA-insured mortgage your lender will have to be sanctioned by the Federal Housing Administration. Many first-time home buyers and those with fewer funds for upfront costs use this type of mortgage. The main benefits of an FHA loan are a smaller down payment, easier credit qualifications and lower monthly payments. Ask your lender about the documents required to apply for an FHA loan and what the process entails.
Can you approve loans in-house?
A number of lenders are able to underwrite their own loans, which means they review it, enter your exact financial figures and determine whether you are approved or denied. It may be advantageous to use a lender who does in-house underwriting because they know their own guidelines and know how to package a mortgage that won’t need any additional conditions for approval.
How long will it take to get a loan?
It is impossible to say for certain how long the loan process will take, but a normal application-to-approval time is 3–7 weeks. A more precise timeframe is helpful to know because you have to establish a closing date in the purchase offer (which becomes your purchase contract after a price is agreed upon). For that reason, it’s important to discuss with your lender the anticipated turnaround time and how long it will take for the funds to be accessed after loan approval.
What is the minimum down payment required?
The down payment amount is dependent on a number of different variables. The amount typically runs between 3.5 and 20 percent of the purchase price. The type of mortgage you get is a big factor in how much money you are required to put down. For example, an FHA loan only calls for 3.5%, while conventional loans are more apt to want 15 or 20 percent down. This is an extremely critical aspect of buying a home and something that greatly influences the type of loan a lender can offer you.
What is your track record?
Ask your lender for reviews from previous clients. A professional, well-prepared lender should have this readily available and will be happy to oblige. You can also inquire about their past experience with situations like your own—for instance, if you want to use an FHA loan, you don’t want a Jumbo loan specialist.
Mortgage Dream Team
Mortgage Dream Team
Dream Town has partnered with Guaranteed Rate, The Home Purchase Experts®, to continue to build relationships we value with you, our community, and friends. This relationship will not only allow us to offer unparalleled service, but provide you with a full service home buying experience.
Guaranteed Rate believes your experience is important, which is why they offer low-rate, low-fee mortgages with a simple, easy-to-understand process.
Stop by any Dream Town office, have a cup of coffee with your Dream Town agent and your Guaranteed Rate mortgage professional, and let's discuss your real estate goals!