Learning Center
Mortgage Learning Center
You may have heard friends or family talk about the headaches and hassles many people commonly associate with a mortgage. The mortgage process doesn’t have to be overwhelming. We’ve put together the helpful resources you need to understand your mortgage options and the mortgage process in our Mortgage Learning Center .
The questions you have are probably also questions most customers ask. Explore the questions below to find answers to the most common mortgage questions.
You can also estimate your monthly payments with our mortgage calculator. It enables you to easily plug in different rates and terms to compare mortgage options.
Credit
A credit score attempts to give insight into a borrower’s credit history with a single number and helps lenders analyze the borrower’s ability to take on additional debt, such as a mortgage. Below are a few factors that contribute to your credit score:
- Length of time you’ve had a credit account open (Newer accounts are scored differently than established accounts with long payment history.)
- Payment history on your accounts. Have you paid everything on time?
- How you utilize your credit. Are you using all of your credit card’s limit or do you only use it when you need it?
- Negative credit events, such as bankruptcies, collections, etc.
- Inquiries into your credit. Credit bureaus use this to see if you are looking to establish new debt.
- The number of open, active accounts. Do you have one debt or twenty?
- Type of accounts open. Consumer finance company debts are scored differently than mortgage debts or auto loans.
By federal law, you are entitled to receive a free credit report every 12 months from each bureau. You may obtain this free report from Annual Credit Report. This website is authorized by the government to provide free credit reports. You may also contact one of the three bureaus.
Equifax (1-800-685-1111)
TransUnion (1-800-916-8800)
Experian (1-888-397-3742)
You can improve your score over a period of time using the following guidelines:
- Do not apply for credit frequently. Every time you apply for credit, there an inquiry on your credit report, and a high number of inquiries can reduce your score.
- Reduce your credit card balances as much as possible.
- Make sure to pay your bills on time. Late payments and collections can have a serious impact on your score.
Approval & Fees
A loan pre-approval simplifies the home buying and mortgage process by allowing your lender to review a lot of your documentation up front. As a pre-approved buyer, your offer on a home will be taken more seriously because it shows that you are qualified to borrow up to a certain amount of money.
When you grant a lender permission to pull your credit for a pre-approval it constitutes what is known as a hard inquiry. A hard inquiry could affect your credit score slightly. However, don’t let that stop you from shopping multiple lenders to compare and contrast rates and programs. The major credit bureaus see the value in comparison shopping and provide an exception for homebuyers. Rather than count every mortgage credit pull against you, credit bureaus treat all of the hard inquiries within a certain time period as one, big credit pull. The time frame depends on the scoring model the lender uses.
Fees vary according to the details of your loan. The average borrower will pay between 2% and 5% of the loan amount in various closing costs and prepaid expenses when they close on a mortgage. The fees you will pay are outlined in your Loan Estimate that your lender is required to provide within 3 days of your application. Be sure to review the loan estimate carefully and ask questions if there is something you do not understand.
Examples of typical closing costs and prepaid expenses include:
- Loan origination fee
- Discount points
- Credit report
- Flood certification
- Application/Commitment fee
- Appraisal
- Prepaid interest
- Homeowners insurance premium
- Mortgage insurance premium
- FHA, VA, and USDA premiums
- Attorney’s fees
- Title search fee
- Lender’s title insurance
- Owner’s title insurance
- Recording fees
- Home inspection
- Pest inspection
- Property survey
- Property taxes
APR takes certain loan costs into consideration as financing costs and displays a rate that includes these costs. Your APR is shown on your Loan Estimate.
Points (also called Discount Points) are fees that lenders charge to allow borrowers to reduce the interest rate on their mortgage over the life of the loan. When you pay points you are offered rates lower than the market allows that day. So, you may be able to save a significant amount of money over the life of the loan if you consider this option, but choosing this option will increase your closing costs. One point equals one percent of the loan amount. On a $100,000 loan, one point is $1,000.
Property Preparation
Both a home inspection and an appraisal are designed to protect you against potential issues with your new home. Because they have completely different purposes, you should rely on each of these reports uniquely to help confirm that you’ve found the perfect home.
The appraiser is generally looking at the marketability of your home. Is it similar in type, quality, square footage, condition to other homes in your market? Those factors will help your appraiser come up with a reasonable value of your home. During the appraisal inspection, your appraiser may also make note of obvious conditions that may affect the livability or marketability of the home such as broken windows, damaged flooring, roof leaks, unsafe decking, or foundation structural deficiencies.
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 or furnace. That’s where the home inspector comes in. Home inspectors perform a detailed inspection of your home from the attic to
An appraisal determines the value of the property you are purchasing or refinancing. It helps ensure you are not buying a property for more than the typical market value.
An appraiser must be licensed by the state. Usually, the appraiser will inspect both the interior and exterior of the home. However, in some cases, only an exterior inspection will be necessary based on your financial strength and the location of the home.
After the appraiser inspects the property, he or she will compare the qualities of your home with other homes that have sold recently in the same neighborhood. These homes are called “comparables” and play a significant role in the appraisal process. Using industry guidelines, the appraiser will try to weigh the major components of these properties (i.e., design, square footage, number of rooms, lot size, age, etc.) to the components of your home to come up with an estimated value of your home. The appraiser adjusts the price of each comparable sale (up or down) depending on how it compares (better or worse) with your property.
To access the equity in your home you can obtain a home equity loan, home equity line of credit, or you can look into a “cash out” refinance mentioned above. These type of loans can be used for unexpected expenses, consolidating debt, home improvements, education expenses, and even vacation expenses.
Mortgages
A type of mortgage in which the underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. About 35-50% of mortgages, depending on market conditions and consumer trends are conventional mortgages. In other words, Fannie Mae and Freddie Mac guarantee or purchase 35-50% of all mortgages. Conventional mortgages may be fixed-rate or adjustable-rate mortgages. The Conventional Loan qualifying ratio allows only 28% toward housing and 36% towards housing and other debt
Read more: http://www.investopedia.com/terms/c/conventionalmortgage.asp#ixzz1kciQrGio
FHA) loan is a mortgage that is insured by the Federal Housing Administration (FHA) and issued by an FHA-approved lender. FHA loans are designed for low-to-moderate-income borrowers; they require a lower minimum down payment and lower credit scores than many conventional loans.
Purchases and refinances – loan limits vary by area
- Maximum base loan amount in metro area
- Minimum down payment is 3.5%
- UFMIP (Up front Mortgage Insurance Premium) – is 1% on a 03 (B) 30 year loan above 95% LTV. Monthly MIP may change according to down payment and term.
Borrower may request monthly MIP be dropped after five years once LTV reaches 78% of the original appraised value of the home on terms more than 15 years.
U.S. Department of Agriculture (USDA) home loans open the dream of owning a home up to people in low-population areas who otherwise could not afford it. If you live in a place with a population of less than 35,000 and you can’t qualify for a conventional loan, you may qualify for a USDA guaranteed loan or a USDA direct loan. One of these mortgage programs could be your ticket to getting out of an overcrowded, unhealthy, or unsafe housing situation and into a place of your own that has running water, electricity, heat, sanitary waste disposal, and enough space.
USDA = Guaranteed Debt Ratio 29/41
Income limit, based on area’s median income – Loan amount set/based upon appraisal value
2% guarantee free, can be financed – 102% LTV max
Mainly purchase – can only refi if existing USDA loan
Adjustable-Rate Mortgages (ARMs): loans that are designed to provide a lower interest rate than fixed-rate loans in exchange for a shorter fixed period. Monthly payments will adjust up and down as interest rates adjust (as spelled out in ARM contract). These loans allow the buyer to qualify for a bigger loan as the discounted rate provides a lower monthly payment.
ARM loans come in 1 year 3/1, 5/1, 7/1, and 10/1 ARMS. In the case of a 3/1 ARM, the “3” represents the fixed period of 3 years. The “1” represents the adjustment period. After the initial 3-year fixed period, the loan would adjust every year thereafter.
ARM Components
The Index: is the financial instrument, which adjusts up and down, used to compute the adjustable interest rate. Known as the ‘index rate’, the various induces are published in the Wall Street Journal and other financial publications on a daily basis.
The Margin is the yield or spread added to the index rate that, when totaled, makes up the note rate or fully indexed rate. The margin is fixed and will never change as the index rate adjusts up and down.
Index + Margin =Note Rate (Fully Indexed Rate)
Adjustment Period is the period of time between rate adjustments. A loan with a one year adjustment period will adjust annually.
- Caps are the limits that the ARM loan can adjust
- Interim Caps or Adjustment caps are the maximum amount a loan can adjust up or down in any one adjustment period. Commonly it is set at 2%
- Lifetime Caps limits that the loan can adjust over the life of the loan term. These are commonly set at 6%.
- Payment Caps are designed to limit the amount the payment can adjust, used to reduce payment shock. Can result in Negative Amortization.
Home Equity Lines of Credit (HELCOs): open-ended lines of credit that are secured by a mortgage lien on a borrower’s property. HELOCs are variable rate loans that have no set adjustment period and will move freely up and down with the index. They are commonly tied to the Prime Rate Index. Used by borrowers to have ongoing access to property’s equity.
Balloon Mortgages are loans that carry a lower rate of interest than fixed-rate loans in exchange for a Call provision. Balloons amortize for 30 years but mature or are called due in a shorter period of time.
Interest Only Option Loans: Referred to as an IO option, this product has many terms, options and interest types associated with it. The borrower is required to pay only interest due. During this time the rate may fluctuate or may be fixed. Fluctuating rates are based on the prescribed index. After the interest only period, principal and interest for required payments the remaining loan may be due in full.
Designed for homeowners who is 62 or older, Reverse Annuity Mortgages allow senior homeowners to use home equity to supplement their income or do home improvements. To qualify home owners should have considerable home equity that can be borrowed against. Funds as a lump sum, fixed monthly payment or line of credit.
Key Benefits:
- Reverse borrowers are not required to qualify based on credit history or income because no repayment is required.
- Payments from reverse mortgage are tax free.
- Borrower can choose to receive monthly payments, lump sum payment or access to a credit line.
Other Important Definitions
Principal the amount of money you borrow or the total amount loaned, shown as the face value of the mortgage note. It is also monthly mortgage payment that reduces the amount of the outstanding debt against the property.
Interest is a fee or sum of money paid for borrowing money.
Principal and Interest Payment (PI) refers to the two combined components of the mortgage payment amortized over a specific period, designed to retire the debt.
PITI the acronym commonly used to describe the Principal, Interest, Taxes and Insurance that make up the four main components of a monthly mortgage payment.
Equity is the owner’s interest or net value of an asset. It represents the difference between the current value of a property and the outstanding balance of all liens against it.
Appraised Value or Fair Market Value is an estimate of a property’s value by a qualified appraiser.
Appreciation is considered the passive increase in value of real property over time.
Escrow is where money is held by the service of a loan on behalf of the borrower into which they deposit a portion of each monthly mortgage payment for property taxes and insurance.
Bridge Loan is a short-term loan and is generally interest only. It’s used to help buyers settle on a new home before the present home is sold.
