What is an adjustable-rate mortgage?
An adjustable rate mortgage, or ARM, offers a lower initial interest rate than most fixed rate loans. However, that rate resets periodically, usually in relation to an index. When the rate changes, the monthly payment will go up or down accordingly. For example, the rate on a 5/1 ARM is fixed rate for the first five years, and then adjusts annually each year after that.
Should I pay points in exchange for a lower interest rate?
Each point is equal to one percent of the loan amount. Points are considered a form of interest; you pay them up front in exchange for a lower interest rate. This means more money is required at closing, but you will have lower monthly payments.
To determine whether it makes sense for you to pay points, divide the total cost of the points by the savings in each monthly payment. This calculation provides the number of payments you'll make before you begin to save money by paying points. If the number of months it will take to recoup the points is longer than you plan on having the mortgage, you should consider a loan that does not require points to be paid.
Can I pre-qualify for a loan before I find a property to purchase?
Yes. Pre-qualifying for a mortgage loan before you find a home may be the best thing you could do.
What is a Rate-Lock Policy?
A rate-lock is an agreement by the borrower and the lender that specifies the number of days for which a loan's interest rate is guaranteed. Should interest rates rise during that period, the lender is obligated to honor the committed rate. Should interest rates fall during that period, the borrower will still keep the original locked interest rate.
When Can I Lock?
Your lender will lock your interest rate once you have an accepted Offer to Purchase on a home.
Rate Lock Changes
What are closing costs and how they are determined?
Once your lender rate locks your loan, you will not be able to renegotiate the interest rate.
A home loan involves many fees, such as the appraisal fee, title charges, closing fees and state or local taxes. These fees vary from lender to lender. Lenders must give you a complete and accurate estimate of fees in advance of loan closing.
Fees are grouped by type and described below:
Third Party Fees
Third-party fees include the appraisal fee, credit score fee, settlement or closing fee, survey fee, tax service fees, title insurance fees, flood certification fees and courier/mailing fees. Third-party fees are collected and passed on to the person who actually performed the service. For example, an appraiser is paid the appraisal fee, and a title company or an attorney is paid the title insurance fees.
Points, document preparation fees, loan processing fees and other fees are retained by the lender. This is the category of fees that you should compare very closely from lender to lender before deciding which loan program to pursue.
You may be asked to prepay some items at closing that will actually be due in the future. These fees are sometimes referred to as prepaid items.
What is title insurance and why do I need it?
- One of the more common required advances is called "per diem interest" or "interest due at closing". Some mortgages have payment due dates of the first of the month. If your loan is closed on any day other than the first of the month, you'll pay interest from the date of closing through the end of the month at closing. For example, if the loan is closed on June 15, interest due from June 15-30 will be collected at closing. This also means you won't make your first mortgage payment until August 1. This type of charge should not vary from lender to lender; it is simply a matter of when it will be collected
- If one will be established, you will make an initial deposit into an escrow account at closing so that sufficient funds are available to pay the bills when they become due
- Whether or not you must purchase mortgage insurance depends on the size of the downpayment you make
- If your loan is a purchase, you'll also need to pay your first year's homeowner's insurance premium prior to closing
The function of a title insurance company is to make sure your rights and interests to the property are clear, that transfer of title takes place efficiently and correctly, and that your interests are fully protected. Title companies typically issue two types of title policies:
- Owner's Policy, which covers you, the home buyer
- Lender's Policy, which covers the lending institution over the life of the loan
If the loan is for a purchase, both owner's and lender's policies are issued at the time of closing for a one-time premium.
Before issuing a policy, the title company searches public records to determine if anyone other than you has an interest in the property. The search may use either public records or, more likely, the information contained in the company's own title records.
After a thorough examination of the records, any title problems are usually found and can be cleared up prior to your purchase of the property. Once a title policy is issued, if a claim covered under your policy is filed against your property, the title company will pay the legal fees involved in the defense of your rights. The title company is also responsible for covering any losses arising from a valid claim. This protection remains in effect as long as you or your heirs own the property.
The fact that title companies try to eliminate risks before they develop makes title insurance significantly different from other types of insurance. Most forms of insurance assume risks by providing financial protection through a pooling of risks for losses arising from an unforeseen future event, like a fire, accident or theft. On the other hand, the purpose of title insurance is to eliminate risks and prevent losses caused by defects in the title that may have occurred in the past.
This risk elimination has benefits to both the homebuyer and the title company. It minimizes the chances that adverse claims might be raised, thereby reducing the number of claims that have to be defended. This maintains low costs for the title company and low premiums for the homebuyer.
What is mortgage insurance and when is it required?
Private mortgage insurance, or PMI, makes it possible for you to buy a home with a downpayment of less than a 20% by protecting the lender against the additional risk associated with low downpayment lending. By purchasing mortgage insurance, lenders are comfortable with downpayments as low as 3.5% or 5% of the home's value.
The mortgage insurance premium is based on loan-to-value (LTV) ratio, type of loan, and amount of coverage required by the lender. Usually, the premium is included in your monthly payment and one to two months of the premium is collected as a required advance at closing.
It may be possible to cancel PMI at some point, such as when your loan balance is reduced to a certain amount (below 75% to 80% of the property value). Federal legislation requires automatic termination of mortgage insurance for many borrowers when their loan balance has been amortized to 78% of the original property value.
Is a gift an acceptable source of my downpayment?
Gifts are an acceptable source for part of the downpayment, if the gift giver is related to you or is your co-borrower. The lender will ask you for the name, address, and phone number of the gift giver, as well as the donor's relationship to you. Prior to closing, the lender will need a copy of your bank receipt or the relevant deposit slip to verify that you’ve received the gift funds and deposited them into your account.
What happens at the loan closing?
The loan closing is where the loan is finalized and the sale and transfer of the property take place. Learn more in
Step 6: The Closing Process.
Can I get advance copies of the documents I will be signing at closing?
The most important documents you will sign at closing are the note and mortgage, sometimes called the deed of trust. Unless there are special circumstances, these documents are usually prepared one to two days before your closing. Other documents are prepared by the closing agent the day before or the day of your closing. If you would like copies of the completed documents to be sent to you after they are prepared, contact your lender.
I'm self-employed. How is my income verified?
Generally, the income of self-employed borrowers is verified by obtaining copies of personal (and business, if applicable) federal tax returns for the most recent two-year period.
The lender will review and average the net income from self-employment reported on your tax returns to determine the income that can be used to qualify. The lender cannot consider any income that hasn't been reported as such on your tax returns. Typically, at least a one- or two-year history of self-employment is required to verify that your self-employment income is stable.
What is installment debt?
An installment debt is a loan that is repaid with regular payments, such as an auto loan, a student loan or a debt consolidation loan. Installment debts do not include payments on living expenses such as insurance costs or medical bill payments. Installment debts that have more than 10 months remaining will be considered when determining your qualifications for a mortgage.
What is a credit score and how will it affect my application?
A credit score is one piece of information used to evaluate your application. It is based on information collected by credit bureaus and information reported each month by your creditors about the balances you owe and the timing of your payments. A credit score is a compilation of all this information, converted into a number that helps a lender to determine the likelihood that you will repay the loan on schedule. Credit bureaus, not lenders, calculate the score, which generally range between 300 and 850. A higher score generally represents a greater likelihood that you will repay the loan on time.
Among the factors that affect your credit score are your payment history, outstanding obligations, the length of time you have had outstanding credit, the types of credit you use, and the number of recent inquiries about your credit history.
Using credit scores to evaluate your credit history allows lenders to quickly and objectively evaluate your credit history when reviewing your application. However, many other factors are taken into consideration when making a loan decision.
How will a foreclosure affect my ability to obtain a mortgage?
Generally, borrowers with foreclosure and/or deeds-in-lieu less than five years prior to the date of a mortgage loan application are unacceptable. Foreclosures/deeds-in-lieu over five years may be considered on a case-by-case basis.
Will inquiries about my credit affect my credit score?
An abundance of credit inquiries can sometimes affect your credit scores since they may indicate that your use of credit is increasing. Note that the data used to calculate your credit score doesn't include mortgage or auto loan credit inquiries that are made during the 30 days prior to the score being calculated. In addition, all mortgage inquiries made in any 14-day period are always considered one inquiry. Don't limit mortgage shopping for fear that it will affect your credit score.
Will my overtime, commission, or bonus income be considered when evaluating my application?
In order for bonus, overtime or commission income to be considered, you must have a history of receiving it and it must be likely to continue. W-2 statements for the previous two years and a recent pay stub will be used to verify this type of income. If a major part of your income is commission earnings, copies of recent tax returns may be needed to verify the amount of business-related expenses, if any. The lender will average the amounts you have received over the past two years to calculate the amount that can be considered a regular part of your income.
If you haven't been receiving bonus, overtime or commission income for at least one year, it probably can't be given full value when your loan is reviewed for approval.
I've co-signed a loan for another person. Should I include that debt here?
Generally, a co-signed debt is considered when determining your qualifications for a mortgage. The lender can ignore the monthly payment of the co-signed debt if you can verify that the person responsible for the debt has made the required payments (by obtaining copies of their canceled checks for the last six months).
I have student loans that aren't in repayment yet. Should I show them as installment debts?
Any student loan that will go into repayment within the next 12 months should be included in the application. If you are not sure exactly what the monthly payment will be, enter an estimated amount.
If student loans that will not go into repayment in the next 12 months are reflected on your final credit report, the lender may ask for verification that repayment will not be required during this time period.
Will my second job income be considered?
Typically, income from a second job will be considered if you can verify a one-year history of secondary employment.
I've had a few employers in the last few years. Will that affect my ability to get a mortgage?
Having changed employers frequently is typically not a detriment to obtaining a new mortgage loan. This is particularly true if you made employment changes without having periods of unemployment between jobs. The lender will also consider your income history as you have changed employment.
If you're paid on a commission basis, a recent job change could be an issue because, without an established payment history with your new employer, the lender might have a difficult time predicting your earnings.
I am retired and my income is from a pension or social security. What will I need to provide?
The lender will ask for copies of your recent pension check stubs or, if your pension or retirement income is deposited directly in your bank account, your recent bank statements. Sometimes it is also necessary to verify that this income will continue for at least three years since some pension or retirement plans do not provide income for life. This can usually be verified with a copy of your award letter. If you don't have an award letter, the lender can contact the source of this income for verification.
If you're receiving tax-free income such as social security earnings, when reviewing your request the lender may take into consideration the fact that taxes are not deducted from this income.
What is an appraisal and who completes it?
To determine the value of the property you are purchasing or refinancing, an appraisal will be required. An appraisal report is a written description and estimate of the value of the property. National standards govern the format for the appraisal, and specify the appraiser's qualifications and credentials. Most states have licensing requirements for appraisers.
The appraiser will create a written report for the lender, a copy of which you'll receive at loan closing. If you'd like to review it earlier, contact your lender.
Usually, the appraiser inspects both the interior and exterior of the home. In some cases, only an exterior inspection will be necessary based on your financial strength and the property's location.
After the appraiser inspects the property, they will compare the qualities of your home with other homes in the neighborhood that have sold recently, called "comparables." Using industry guidelines, the appraiser compares the major components of these properties (e.g., design, square footage, lot size, age) with those of your home to determine an estimated value of your home. The appraiser adjusts the price of each comparable sale depending how it rates against your property.
As an additional check on your property's value, the appraiser also estimates its replacement cost, which is determined by valuing an empty lot and estimating the cost to build a house of similar size and construction. Finally, the appraiser reduces this cost by an age factor to compensate for depreciation and deterioration. If your home is an investment or multi-unit property, the appraiser will also consider the rental income that will be generated.
Using these three different methods, an appraiser will frequently come up with slightly different values for the property. The appraiser uses judgment and experience to reconcile these differences and then assigns a final appraised value. The comparable sales approach is the most important valuation method in the appraisal because a property is worth only what a buyer is willing to pay and a seller is willing to accept.
It is not uncommon for the appraised value of a property to be exactly the same as the amount stated on your sales contract. This is not a coincidence, nor does it question the competence of the appraiser. Your purchase contract is the most valid sales transaction there is. It represents what a buyer is willing to offer for the property and what the seller is willing to accept. Only when the comparable sales differ greatly from your sales contract will the appraised value be very different.
How long does the property appraisal take to be completed?
The lender orders the appraisal from a licensed professional as soon as the application deposit is paid. Generally, it takes 10 to 14 days before the lender receives the written report. If you are refinancing and an interior inspection of the home is necessary, the appraiser should contact you to schedule a viewing appointment. If you don't hear from the appraiser within seven days of the order date, inform your lender. If you are purchasing a new home, the appraiser will contact the real estate agent or the seller to schedule an appointment to view the home.
Are there any special requirements for condominiums?
Since the value and marketability of condominiums is dependent on items that don't apply to single family homes, there are some additional steps that must be taken to determine if condominiums meet guidelines.
One of the most important factors is determining whether the condominium development is complete.
Because the lender cannot be certain that the remaining units will be of the same quality as existing units, which could affect the marketability of your home, many lenders cannot provide financing for condominiums until the development or at least the phase of the development in which your condominium is located, is complete.
In addition, a lender will consider the ratio of non-owner-occupied units to owner-occupied units. This could also affect future marketability because many people would prefer to live in a project that is occupied by owners rather than renters.
Finally, a lender will ensure that the appraisal includes information on comparable sales of properties within the project, as well as sales of properties outside the project to provide a better idea of the condominium project's marketability.
Depending on the percentage of the property's value you'd like to finance, other items may also need to be reviewed.
Do I need a home inspection and an appraisal?
Both a home inspection and an appraisal are designed to protect you against potential issues with your new home. Although they have totally different purposes, it makes the most sense to rely on each to confirm that you've found the perfect home.
The appraiser will make note of obvious construction problems such as termite damage, dry rot or leaking roofs or basements. Obvious interior or exterior damage that could affect the salability of the property will also be reported.
However, appraisers are not construction experts and won't find or report items that are not obvious. They won't turn on every light switch, run every faucet, or inspect the attic. That's where the home inspection comes in. Home inspectors perform a detailed inspection and can educate you about possible concerns or defects with the home. See Step 5: The Home Inspection to learn more.
Do all lenders require flood insurance on properties?
Federal Law requires all lenders to investigate whether homes they finance are in a special flood hazard area as defined the Federal Emergency Management Agency (FEMA). The law can't stop floods, but the Flood Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994 help to ensure that you will be protected from financial losses caused by flooding.
The lender will use a third-party company who specializes in reviewing flood maps prepared by FEMA to determine if your home is located in a flood area. If it is, flood insurance coverage will be required, since standard homeowner's insurance doesn't protect you against damages from flooding.