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Frequently Asked Questions
When it comes to getting a new home mortgage, there is a lot of information to digest. Read on to find answers to some of the more common mortgage and home loan questions.
With Wallick & Volk, there is absolutely no charge for getting pre-qualified for your home mortgage. Further, you are not under any obligation to use this site to apply for a loan, whether you use it to review interest rates and terms for a loan, or to get loan pre-qualification.
Unfortunately, industry advertisers often launch marketing campaigns that offer a low “teaser” interest rate simply to make the phone ring. This unusually low rate may only be available for a specific loan program that fits a small pool of qualified borrowers, but they won’t tell you that upfront.
The truth is that mortgage interest rates are not controlled by lenders, and can fluctuate up to several times in any day. Once you understand how rates are determined, you’ll feel more comfortable about your mortgage interest rate and the home financing process.
Keep in mind that although loan programs, credit scores and economic factors affect the mortgage interest rate you’re offered, the borrower always has the option of paying a one-time, upfront fee to secure a lower interest rate.
The initial interest rates for adjustable rate mortgages are normally lower than a fixed rate mortgage, which in turn means your monthly payment is lower. If you only plan to stay in your home for a short period of time, an ARM loan might be advantageous to you because you plan on moving or selling your home before your initial mortgage rate adjusts. If you expect your income to increase in the future, you might feel comfortable with the idea of saving money now by having a lower monthly payment but be comfortable with having to make higher payments in the future when your income rises and your ARM adjusts.
ARMs are generally considered riskier because your interest rate will probably go up after the initial fixed-rate period ends.
The “LTV” or Loan-to-Value ratio tells you how much equity you have in your home. Equity is the difference between how much your home is worth and how much you owe on it. For example, if your home is worth $250,000 and you owe $200,000 on your mortgage, you have $50,000 worth of equity in your home. To determine your LTV, divide your current loan amount by your home’s value. In this case, your LTV would be 80%.
LTV is important in determining your qualification for a home mortgage and the rate you receive. In general, the lower your LTV, the lower your rate will be. A higher LTV indicates that there is a greater risk the borrower may default on the loan.
Private Mortgage Insurance (PMI) protects lenders against losses that can occur when a borrower defaults on a mortgage. PMI is required on first mortgage purchase transactions when the borrower has less than a 20% down payment. Likewise, it is required on first mortgage refinance transactions when the borrower has less than 20% equity in the property being refinanced. The cost of the mortgage insurance is typically added to the monthly mortgage payment.
The terms and conditions of a conforming loan meet the standards of Freddie Mac and Fannie Mae (GSEs); and are eligible for purchase by the GSEs. Non-conforming loans are conventional (not government-insured) loans that do not meet GSE guidelines. Examples are Jumbo, sub-prime, construction and portfolio loans.
Technically, a conventional loan is any mortgage that is not a government-guaranteed or insured FHA, VA or USDA loan. However, when a lender mentions a conventional loan they are generally referring to a conforming mortgage that is eligible for purchase by Fannie Mae and Freddie Mac.
“Interest rate” is the monthly cost you pay on the unpaid balance of your home loan.
“Annual Percentage Rate (APR)” The Annual Percentage Rate (APR) of a loan is actually ‘the cost of borrowing money.’ It includes both your interest rate and any additional costs or prepaid finance charges, including such items as an origination fee, points, private mortgage insurance, underwriting and processing fees. The actual fees on your mortgage may not include all of the items above.
While your interest rate is the rate at which you will make your monthly mortgage payments, the APR is a universal measurement that can assist you in comparing the cost of mortgage loans offered by different mortgage lenders.
Because the rate on an ARM loan can adjust, they are typically offered with a lower introductory rate. ARM loan rates are tied to one of several indexes, such as the London Inter-Bank Offer Rate (LIBOR) or the Treasury Bill index. Some initial ARM interest rates and payments vary greatly from rates and payments due later in the loan term, and can adjust every month, quarter, year, 3 years, or 5 years. The period between rate and payment changes is called the adjustment period.
How Your Credit Score Affects Loan Approval
When you are ready to obtain a mortgage at the best possible interest rate, your credit score is one the most important factors in receiving a pre-qualification or approval. In addition, your credit score and history go a long way towards determining what interest rate you may receive from your lender. Your credit score is a number that is determined from the information in your credit report. Credit scores can range from 300 to 850, depending on the credit scoring agency. The higher the number, the better your credit rating. Your credit score helps a lender establish your willingness and ability to pay. Following excellent money-management practices over time will improve your credit and enhance your potential to secure an affordable home loan.
Components of a Credit Score
Payment History – 35 percent
Your payment history has one of the biggest impacts on your overall score. It is essential that you pay bills on time. Every late payment, collection, judgment, or bankruptcy significantly lowers your score.
Amounts Owed – 30 percent
Your available credit is compared to the total amount you owe. The amount of available credit you’re using on revolving accounts is heavily weighted. A good rule is to owe 40% or less of the total amount of credit extended.
Length of Credit History – 15 percent
How long have you been borrowing money? Overall, if your accounts have been open longer, the more positive the impact on your credit score. It may be best not to close a credit card you’ve held for several years, even if you maintain little activity on the account.
Types of Credit – 10 percent
Maintaining various types of credit (credit cards, installment loans, home loans) can be beneficial to your score. In general, closed loans (such as a car loan that has been paid off) combined with active credit, demonstrate that you have experience managing your money. However, too many open installment loans can negatively affect your credit.
New Credit – 10 percent
Have you applied for new credit? Be aware that your credit score can be negatively impacted when you apply for too much new credit in a short period of time.
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically according to a pre-selected index.
The loan amount less “prepaid finance charges”, which are lender fees paid at closing.
Annual Percentage Rate (APR)
A term used in the Truth-in-Lending Act that represents the percentage relationship of the total finance charge to the amount of the loan. The APR reflects the cost of your mortgage loan as a yearly rate. It will be higher that the interest rate stated on the note because it includes, in addition to the interest rate, loan discount points and fees, and mortgage insurance.
A report made by a qualified person setting forth an opinion or estimate of property value. The term also refers to the process by which this estimate is obtained.
A loan which calls for periodic payments that are insufficient to fully amortize the face amount of the note prior to maturity, so that a principal sum, known as a “balloon”, is due at maturity.
Optional Discount Points
A payment to the lender from the seller, buyer, or a third party, in order to reduce the interest rate.
Money paid by the borrower in connection with the closing of a mortgage loan. This generally involves an origination fee, discount points, appraisal, credit report, title insurance, attorney’s fees, survey and prepaid items such as taxes and insurance escrow payments.
Closing Disclosure (CD)
The Closing Disclosure, which replaced the HUD-1 Settlement Statement/Truth in Lending Disclosure, must be received by the borrower at least three days prior to Consummation. Most lenders will prepare and deliver this document to the borrower.
Date the borrower signs the Note and is obligated to the debt. Closing documents must not be signed for three business days after the borrower receives the CD. This date does not necessarily coincide with the Funding and Closing Date. If the lender requires original signed documents to be received and reviewed before funding, the Consummation Date and Closing Date will not be on the same day.
Equal Credit Opportunity Act (ECOA)
A Federal law requiring lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex age, marital status, receipt of income from public assistance programs or past exercising of rights under the Consumer Credit Protection Act.
In general, a procedure whereby a disinterested third party handles legal documents and/or funds on behalf of a seller or buyer. An escrow account can be created by an attorney to handle the buyer’s deposit on the property, by the lender to cover repairs that will not be completed before the closing or by the lender to pay the property taxes and insurance premiums.
Fair Credit Reporting Act (FCRA)
A Federal law which requires a lender who is rejecting a loan request because of adverse credit information to inform the borrower of the source of such information.
Federal Home Loan Mortgage Corporation FHLMC (Freddie Mac)
A corporation authorized by Congress. It purchases residential mortgages insured by the Federal Housing Administration or guaranteed by the Veterans Administration as well as conventional home mortgages. It sells participation certificates whose principal and interest are guaranteed by FHLMC.
Federal National Mortgage Association FNMA (Fannie Mae)
A tax-paying corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by the Federal Housing Administration or guaranteed by the Veterans Administration as well a conventional home mortgages.
Any fee representing the cost of credit, or the cost of borrowing. It is interest accrued on, and fees charged for some forms of credit. It includes not only interest but other charges as well, such as financial transaction fees.
The process of analyzing whether a property is located in a known flood zone.
A legal procedure in which property mortgaged as security for a loan is sold to pay the defaulting borrower’s debt.
A contract whereby an insurer, for a premium, undertakes to compensate the insured for loss on a specific property.
An undivided interest in property, taken by two or more joint tenants. Upon the death of a joint tenant, the interest passes to the surviving joint tenant(s), rather than to the heirs of the deceased.
A payment received after the grace period stipulated in the mortgage note. Most mortgage grace periods are 10 or 15 days.
Loan Estimate (LE)
The Loan Estimate (replaces the Good Faith Estimate/Truth in Lending Disclosure), provided within 3 days of application, is a binding disclosure preventing lenders from arbitrarily changing loan terms and costs to the borrower.
Money credited to a borrower during the origination of a loan, often designed to lower fees and costs.
Fees charged by bands and other financial institutions for processing and funding a loan. They can include application fees, processing fees, recording fees, underwriting fees and more. Lender fees are items payable in connection with a loan and contribute to the total amount of the borrower’s costs. These are the cost of doing business.
Loan-to-Value Ratio (LTV)
The ratio of the loan amount divided into the lesser number, sales price or appraised value.
The termination or due date on which final payment on a loan must be paid in full.
Usually, the amount of PITI (principal, interest, taxes and insurance) paid each month on a mortgage loan.
The conveyance of an interest in real property given as security for the payment of a loan.
The lender in a mortgage transaction.
Insurance against loss provided to a mortgage lender in the event of borrower default. In most cases, the borrower pays the premiums.
Mortgage Insurance Premium (MIP)
The consideration paid by a mortgagor (borrower) for mortgage insurance—either to the FHA or to a private mortgage insurer.
A written promise to pay a sum of money at a stated interest rate during a specified term. The not contains a complete description of the conditions under which the loan is to be repaid and when it is due.
The borrower in a mortgage transaction who pledges property as security for a debt.
An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination charge does not vary with the interest rate.
Pest Inspection Fee
While VA loans are the only loan that always require a pest inspection, the vast majority of buyers opt to have a pest inspection completed. This is a service and fee the buyer can shop for.
PITI (Principal, Interest, Taxes and Insurance)
The most common components of a monthly mortgage payment.
Preliminary Title Report
The results of a title company prior to issuing a title binder or commitment to ensure clear title.
The interest that a debtor pays before the first scheduled debt repayment. For taxation purposes, most kinds of prepaid interest are expensed over the life of the loan.
A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of repayment, or a specified number of months interest. Pre-payment penalties are not commonly associated with traditional first mortgages.
Principal & Interest (P&I)
A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to amortization of the principal balance; commonly used with amortizing loans.
A residence which the borrower intends to occupy as the principal residence.
Private Mortgage Insurance
Insurance written by a private company protecting the mortgage lender against loss resulting from a mortgage default.
A levy on property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located, it may be paid to a national government, a federated state, a county or geographical region or a municipality.
Purchase Contract (Agreement Offer)
An agreement between a buyer and seller of real property, setting forth the price and terms of the sale. Also known as a sales contract.
Real Estate Settlement Procedures Act (RESPA)
A Federal law requiring lenders to provide home mortgage borrowers with information on known or estimated settlement costs. It also established guidelines for escrow account balances and the disclosure of settlement costs.
The repayment of a debt from the proceeds of a new loan using the same property as security.
Annulling a contract and placing the parties to it in a position as if there had not been a contract.
A credit to the borrower’s down payment or settlement costs made by a home seller, as an alternative to a price reduction.
Tax Service Fee
A fee charged by some lenders at closing to cover the cost of paying taxes on the borrower’s property when they come due, or (if the borrower is paying taxes), verifying that the payment has been made.
The Total Interest Percentage (TIP) is a new disclosure required by Congress in the Dodd-Frank Act. The TIP tells you how much interest you will pay over the life of your mortgage loan, compared to the amount you borrowed. The total interest percentage is calculated by adding up all of the scheduled interest payments, then dividing the total by the loan amount to get a percentage. The calculation assumes that you will make all your payments as scheduled. The calculation also assumes that you will keep the loan for the entire loan term.
For example, if you have a $100,000 loan and your TIP is 50 percent, that means that you will pay a total of $50,000 in interest over the life of the loan, in addition to repaying the $100,000 that you borrowed. If your TIP is 100 percent, that would mean that you will pay $100,000 in interest (100 percent of the $100,000 loan amount) over the life of the loan.
You can find the TIP for your loan on page 3 of your Loan Estimate or page 5 of your Closing Disclosure. The TIP is most useful as a comparison point between different Loan Estimates.
Title Insurance Policy
A contract in which an insurer, usually a title insurance company, agrees to pay the insured party a specific amount for any loss caused by defects of title on real estate in which the insured has an interest as purchaser, mortgagee or otherwise.
Title – Lender’s Policy
Most title insurance is lender’s title insurance, which is paid for by the borrower but protects only the lender.
Title – Owner’s Policy
Title insurance that protects the owner against loss if there is an adverse claim against the owner’s property and that provides legal counsel to defend against adverse claims. This is a separate policy and in some areas is paid for by the seller to protect the buyer’s equity in the property.
An examination of public records to disclose the past and current facts regarding the ownership of a given piece of real estate.
TILA-RESPA-Integrated-Disclosure -The TILA-RESPA rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms: a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation..
Truth-in-Lending Act (TILA)
A federal law requiring a disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms of financial institutions.