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Home Loan FAQ
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It’s generally a good time to refinance when mortgage rates are 2% lower than the current rate on your loan. It may be a viable option, even if the interest rate difference is only 1% or less. Any reduction can trim your monthly mortgage payments. Example: Your payment, excluding taxes and insurance, would be about $770 on a $100,000 loan at 8.5%; if the rate were lowered to 7.5%, your payment would then be $700, now you’re saving $70 per month. Your savings depend on your income, budget, loan amount, and interest rate changes. Your trusted lender can help you calculate your options.
A point is a percentage of the loan amount, or 1 point = 1% of the loan, so one point on a $100,000 loan is $1,000. Points are costs that need to be paid to a lender to get mortgage financing under specified terms. Discount points are fees used to lower the interest rate on a mortgage loan by paying some of this interest upfront. Lenders may refer to costs in terms of basic points in hundredths of a percent, 100 basis points = 1 point, or 1% of the loan amount.
Yes, if you plan to stay in the property for a least a few years. Paying discount points to lower the loan’s interest rate is a good way to lower your required monthly loan payment, and possibly increase the loan amount that you can afford to borrow. However, if you plan to stay in the property for only a year or two, your monthly savings may not be enough to recoup the cost of the discount points that you paid upfront.
The annual percentage rate (APR) is an interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage because it takes into account points and other credit costs. The APR allows home-buyers to compare different types of mortgages based on the annual cost for each loan. The APR is designed to measure the “true cost of a loan.” It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.
The APR does not affect your monthly payments. Your monthly payments are strictly a function of the interest rate and the length of the loan.
Because APR calculations are affected by the various different fees charged by lenders, a loan with a lower APR is not necessarily a better rate. The best way to compare loans is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. You can then delete the fees that are independent of the loan such as homeowner’s insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.
The following fees are generally included in the APR:
- Points – both discount points and origination points
- Pre-paid interest. The interest paid from the date the loan closes to the end of the month.
- Loan-processing fee
- Underwriting fee
- Document preparation fee
- Private mortgage insurance
- Escrow fee
The following fees are normally not included in the APR:
- Title or abstract fee
- Borrower Attorney fee
- Home inspection fees
- Recording fee
- Transfer taxes
- Credit report
- Appraisal fee
The major portion of other upfront expenses is the deposit or binder you make at the time of the purchase offer, the remaining cash down payment you make at closing or can include:
Inspections – Lenders may require inspections, and you can make your purchase offer contingent based on satisfactory completion of some other inspections such as structural, water quality tests, septic, termite, roof, and radon tests. You and the seller can negotiate these inspection fees.
Owner’s Title Insurance – You may want to purchase title insurance in case of unforeseen problems, so you’re not left owing a mortgage on a property you no longer own. A thorough title search ensures a clear title.
Appraisal Fees – You may want to hire an Appraiser either before you sign a purchase offer or after reviewing the lender’s appraisal report.
Money to the Seller – You’ll need to pay for items in the house you want that were not negotiated in the purchase offer such as appliances, light fixtures, drapes, lawn furniture, or fuel oil and propane left in tanks.
Moving Expenses – If you are changing jobs, your new employer may pay for your relocation; otherwise, you must figure in the moving costs such as truck rentals, professional movers, cash for utility deposits like telephone, cable, electricity, etc.
Escrow Account Funds – In the purchase offer, you can request that the seller set up an Escrow Account to defray any costs for major cleanup, radon mitigation procedures, house painting, appliance repairs, etc. Depending on the purchase offer contract and contingency clauses, you may discover that you have expenses upon moving in.
Example: Your purchase offer contract has a clause making the purchase contingent on a satisfactory structural inspection. If it is determined that the house needs a new roof, you can then negotiate to have the seller arrange for the work to be done. However, this will delay the closing date. To remedy the structural issue, you may have to agree to pay for:
- A higher price for the house, or
- Some of the new roof repair expenses, or
- Part of the cost of the roof with the seller (using estimates from a contractor of your choice and with each of you putting funds into an Escrow Account), or
- A reduced sales price if the seller is willing to reduce the sale price of the house rather than replace the roof. Either way, cash will be needed for the new roof.
Time Investment – One often overlooks major upfront costs in buying a home. The time and expenses invested in house-hunting, which can take up to 4-months, plus the time spent searching for the best mortgage for you, the right real estate agent, an attorney, and other related things that take up your valuable time.
Below is a list of documents that are required when you apply for a mortgage. However, every situation is unique and you may be required to provide additional documentation. So, if you are asked for more information, be cooperative and provide the information requested as soon as possible. It will help speed up the application process.
- Copy of signed sales contract including all riders
- Verification of the deposit you placed on the home
- Names, addresses and telephone numbers of all realtors, builders, insurance agents and attorneys involved
- Copy of Listing Sheet and legal description if available (if the property is a condominium, please provide condominium declaration, by-laws, and most recent budget)
- Copies of your pay-stubs for the most recent 30-day period and year-to-date
- Copies of your W-2 forms for the past two years
- Names and addresses of all employers for the last two years
- Letter explaining any gaps in employment in the past two years
- Work visa or green card (copy front & back)
If self-employed or receive commission or bonus, interest/dividends, or rental income:
- Provide full tax returns for the last two years PLUS year-to-date Profit and Loss statement (please provide complete tax return including attached schedules and statements. If you have filed an extension, please supply a copy of the extension.)
- K-1’s for all partnerships and S-Corporations for the last two years (please double-check your return. Most K-1’s are not attached to 1040.)
- Completed and signed Federal Partnership (1065) and/or Corporate Income Tax Returns (1120), including all schedules, statements, and addenda for the last two years. (Required only if your ownership position is 25% or higher.)
If you will use Alimony or Child Support to qualify:
- Provide divorce decree/court order stating amount, as well as, proof of receipt of funds for last year
If you receive Social Security income, Disability, or VA benefits:
- Provide an award letter from agency or organization
Source of Funds and Down Payment
- Sale of your existing home – provide a copy of the signed sales contract on your current residence and statement or listing agreement if unsold (at closing, you must also provide a settlement/Closing Statement)
- Savings, checking or money market funds – provide copies of bank statements for the last three months
- Stocks and bonds – provide copies of your statement from your broker or copies of certificates
- Gifts – If part of your cash to close, provide Gift Affidavit and proof of receipt of funds
- Based on information appearing on your application and/or your credit report, you may be required to submit additional documentation
Debt or Obligations
- Prepare a list of all names, addresses, account numbers, balances, and monthly payments for all current debts with copies of the last three monthly statements
- Include all names, addresses, account numbers, balances, and monthly payments for mortgage holders and/or landlords for the last two years
- If you are paying alimony or child support, include marital settlement/court order stating the terms of the obligation
- Check to cover Application Fee(s)
Credit scoring is a system creditor’s use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points — a credit score — helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.
The most widely use credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. Your score will fall between 350 (high risk) and 850 (low risk).
Because your credit report is an important part of many credit scoring systems, it is very important to make sure it’s accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:
Equifax: (800) 685-1111
Experian (formerly TRW): (888-397-3742)
Trans Union: (800) 916-8800
These agencies may charge you up to $9.00 for your credit report.
You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian, and TransUnion. This free credit report may not contain your credit score and can be requested through the following website: https://www.annualcreditreport.com
Credit scoring models are complex and often vary among creditors and for different types of credit. If one-factor changes, your score may change — but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application.
Nevertheless, scoring models generally evaluate the following types of information in your credit report:
- Have you paid your bills on time? Payment history is typically a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
- What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
- How long is your credit history? Generally, models consider the length of your credit track record. Insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
- Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at “inquiries” on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not counted.
- How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.
Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well as your job or occupation, length of employment, or whether you own a home.
To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It’s likely to take some time to improve your score significantly.
An Appraisal is an estimate of a property’s fair market value. It’s a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The Appraisal is performed by an “Appraiser,” typically a state-licensed professional who is trained to render expert opinions concerning property values, location, amenities, and physical conditions.
On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage, lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. Sometimes you may need to pay up to a year’s worth of PMI premiums at closing, which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment or ask about other loan program options.
Surprising as it may seem, some folks with hefty incomes find that it’s mighty tough for them to save enough money to make a 20% cash down payment on their dream homes. Using conventional financing, such buyers must purchase Private Mortgage Insurance (PMI) which increases the cost of homeownership and, ironically, makes it even more difficult to qualify for the mortgage. However, if you’re a dues-paying member of the cash-challenged class, don’t despair. Given that your income is sufficiently high, it’s eminently possible to avoid getting stuck with PMI. That is why 80-10-10 financing was invented. It is called 80-10-10 because a savings and loan association, bank, or other institutional lender provides a traditional 80% first mortgage, you get a 10% second mortgage, and make a cash down payment equal to 10% of the home’s purchase price. By using this method, you are no longer obligated to take out PMI on your property.
The same principle applies if you can only afford to make a 5% down, 80-15-5 financing is also available. However, because a smaller cash down payment increases the lender’s risk of default, do not be surprised when you are asked to pay higher loan fees and a higher mortgage interest rate for 80-15-5 than you pay for 80-10-10.
The property is officially transferred from the seller to you at “Closing” or “Funding.”
At closing, the ownership of the property is officially transferred from the seller to you. This may involve you, the seller, real estate agents, your attorney, the lender’s attorney, title or escrow firm representatives, clerks, secretaries, and other staff. You can have an attorney represent you if you can’t attend the closing meeting, i.e., if you’re out-of-state. Closing can take anywhere from 1-hour to several depending on contingency clauses in the purchase offer, or any escrow accounts needing to be set up.
Most paperwork in closing or settlement is done by attorneys and real estate professionals. You may or may not be involved in some of the closing activities; it depends on who you are working with.
Prior to closing, you should have a final inspection, or “walk-through” to ensure requested repairs were performed, and items agreed to remain with the house are there such as drapes, lighting fixtures, etc.
In most states, the settlement is completed by a title or escrow firm in which you forward all materials and information plus the appropriate cashier’s checks so the firm can make the necessary disbursement. Your representative will deliver the check to the seller, and then give the keys to you.