Here are some mortgage questions commonly asked on the internet. Hope you find them helpful.
If you have any other questions or if you need further explanations, feel free to ask me.
How much house can I afford?
Why do I need to check my credit prior to purchasing a house?
How much do I need for a down payment?
How is pre-qualification different from pre-approval?
What is the difference between conforming and large nonconforming loans?
Should I choose fixed or adjustable interest rate mortgage?
What are points?
What is APR (Annual Percentage Rate)?
What are closing costs?
What is PMI (Private Mortgage Insurance)?
What is a rate lock?
Do you have no cost or low cost options?
How long does the mortgage process take?
Is a fixed rate or adjustable rate mortgage better?
What is an APR?
What is Loan-to-Value?
What is an escrow or impound account?
What are Freddie Mac and Fannie Mae?
What is the difference between a conforming and jumbo loan?
What are the advantages of purchasing a home?
How much do I need for a down payment on a home?
Should I get pre-qualified before looking for a property?
Will I have to pay PMI?
Is it a good idea to refinance my home?
Can I refinance for no cost or low cost?
Is it worth refinancing if I only see a small change in my current rate?
Can I eliminate PMI by refinancing?
Why would I choose an ARM over a fixed rate mortgage?
Are low down payment options available for buyers who can’t afford a 20% down payment?
What kinds of government loans are available to homebuyers?
Which is better — a fixed or adjustable rate mortgage?
Can I tap into my IRA or 401(k) plan for down payment money?
The amount of a loan for which you qualify is based on two different calculations. Using what are known as qualification ratios, lenders evaluate your income and long-term debts to determine a “safe” amount for your mortgage payments. A fairly standard ratio is 28/36. Certain mortgage plans sometimes use more liberal ratios-for example, the Fair Housing Authority (FHA) currently uses 29/41.
Here’s how it works: With a 28/36 ratio, you are allowed to spend up to 28% of your gross monthly income for mortgage payments.
The lender will then run a different calculation. This one is your loan payment and debt payments combined, which may not exceed 36% of your gross monthly income.
To calculate exactly how much you may borrow, you also need an estimate of interest rates. For example: Suppose you had $1,000 a month for mortgage payment; at 7% that would let you borrow about $160,000 on a 30-year loan. At 6% the loan amount would be nearly $175,000.
As part of this calculation, you also need to estimate and include the property taxes, homeowner’s insurance, and homeowner association fees (if applicable) you might need to pay, which are considered part of your monthly expense.
Why do I need to check my credit prior to purchasing a house?
Even if you’re sure you have excellent credit, it’s wise to double-check at the outset. Straightening out any errors or disputed items now will avoid troublesome holdups down the road when you’re waiting for mortgage approval.
You may see disputed items, in addition to errors caused by a faulty Social Security number, a name similar to yours, or a court ordered judgment you paid off that hasn’t been cleared from the public records. If such items appear, write a letter to the appropriate credit bureau. Credit bureaus are required to help you straighten things out in a reasonable time (usually 30 days).
How much do I need for a down payment?
Most lenders offer financing programs that allow the borrower to finance up to 100% of the sales price of a new home. However, if no down payment is made, the borrower will be required to pay for private mortgage insurance (PMI), see question ten, below, for further information on PMI. If you can afford to put more money toward a down payment, it will reduce the amount of your monthly mortgage payments. Some loans programs offer 3% down payments if you meet certain income standards. The Veterans Administration (VA) and the Rural Housing Service (RHS) also offer no-down-payment loans.
The lender will want to know how much money you plan to put down and the source of those funds. Sources you may draw upon include savings, stocks and bonds, pension funds, real estate holdings, life insurance policies, mutual funds, and employee savings plans.
You may also use a gift of money from a family member that need not be repaid. If you do this, you will need to present a letter to your lender that states the amount of the gift, is signed by the giver, and is notarized by a third party. A gift letter “form” may be obtained from your lender.
You are also now allowed to withdraw up to $10,000 from both traditional and Roth Individual Retirement Accounts (IRAs) with no early withdrawal penalty, if used towards buying your first home.
Under some mortgage programs, such as Fannie Mae’s Community Home Buyer’s ProgramSM with the 3/2 Option, part of your down payment may come from a grant from a nonprofit housing provider in your community.
How is pre-qualification different from pre-approval?
Any reputable Mortgage Banker will “pre-qualify” you for a mortgage before you start house hunting. This process includes analyzing your income, assets, and present debt to estimate what you may be able to afford on a house purchase. Real estate brokers can also calculate the same sort of informal estimate for you.
Obtaining mortgage “pre-approval” is another thing entirely. It means that you have in hand a lender’s written commitment to put together a loan for you (subject to verification of income and employment).
Pre-approval makes you a strong buyer, welcomed by sellers. With most other purchases, sellers must tie the house up on a contract while waiting to see if the would-be buyer can really obtain financing.
What is the difference between conforming and large nonconforming loans?
The term “conforming,” as opposed to “nonconforming,” is sometimes used to explain loans that offer terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These are the two private, congressionally chartered companies that buy mortgage loans from lenders, thereby ensuring that mortgage funds are available at all times in all locations around the country.
The most important difference between a loan that conforms to Fannie Mae/Freddie Mac guidelines and one that doesn’t fit its loan limit. Fannie Mae and Freddie Mac will purchase loans only up to a certain loan limit (currently it is $417,000).
If your loan amount will be for more than the conforming loan limit, the interest rate on your mortgage may be higher or you may have slightly different underwriting requirements, particularly in regard to your required down payment amount. Check with your lender about this if you are taking out a large loan payment.
TIP: Nonconforming loans are sometimes called “jumbo loans.”
Should I choose fixed or adjustable interest rate mortgage?
Interest rates are usually expressed as an annual percentage of the amount borrowed. You can choose a mortgage with an interest rate that is fixed for the entire term of the loan or one that changes throughout. A fixed-rate loan gives you the security of knowing that your interest rate will never change during the term of the loan. An adjustable-rate mortgage (called an ARM) has an interest rate that will vary during the life of the loan, with the possibility of both increases and decreases to the interest rate and consequently to your mortgage payments.
In the special vocabulary of mortgage lending, “points” are a type of fee that lenders charge (the full term to describe this fee is “discount points”). Simply put, a point is a unit of measure that means 1% of the loan payment. So, if you take out a $100,000 loan, one point equals $1,000.
Discount points represent additional money you can pay at closing to the lender to get a lower interest rate on your loan. Usually, for each point on a 30-year loan, your interest rate is reduced by about 1/8th (or .125) of a percentage point.
Tip: Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points.
What is APR (Annual Percentage Rate)?
Annual Percentage Rate (APR) factors interest plus certain closing costs, any points and other finance charges over the term of a loan. The APR must be disclosed to you according to federal Truth-in-Lending laws within three business days of when you apply for a loan, or prior to or at closing for a refinance.
On the day you actually buy your new home, in addition to your down payment, the prepaid property tax and homeowners insurance premiums, you’ll need cash for various fees associated with the purchase. These expenses are known as closing costs and are paid by both buyers and sellers.
Some closing costs you pay up-front when you apply for a mortgage loan. Those include money for a credit check on all applicants and an appraisal on the property. Keep in mind that even if you don’t eventually receive the loan, that money is not refundable.
Other closing costs are possible and should be considered when evaluating your financial situation. These may include, but are not limited to:
* Title insurance fee
* Survey charge
* Loan origination fee
* Attorney fees or escrow fees
* Document preparation fee
Points-up-front, (interest paid in return for a lower interest rate). Each point is one percent of the loan amount. Sometimes you can contract for the seller to pay your points.
What is PMI (Private Mortgage Insurance)?
If you put less than 20% down on most loans, you’ll be asked to protect the lender by carrying private mortgage insurance (PMI). Carrying PMI ensures that the debt is repaid if you default on the loan. This charge adds approximately an extra half a percent onto the loan.
FHA mortgages, in return for their low-down-payment requirements, also charge for mortgage insurance premiums (MIP).
A rate lock is a lender’s guarantee of an interest rate for a set period of time, usually between loan application and loan closing. A lock period can range anywhere between 15 days to 90 days during which time you, as a borrower, are protected against rate fluctuations. Rate locks can be expensive for lenders, and so it is usually true that the longer the lock-in period, the higher the cost is for you.
Do you have no cost or low cost options?
Absolutely. With the large variety of loan programs available today, there’s many different ways you can finance your home. With a no cost or minimal cost loan, you can see immediate savings in your payment amounts, and you won’t have to sacrifice your savings or equity to get a great rate. There are no down and low down payment home purchase options and no cost refinance programs.
How long does the mortgage process take?
The length of the mortgage process depends on a number of things. For example, some mortgage transactions are subject to a three-day legal “right of rescission,” which starts the day you sign the disclosure document. This legal right automatically could add three days onto your mortgage funding. Also, specific types of mortgage loans have pre-determined timeframes. The closing date on a purchase loan is determined by the escrow closing date agreed upon by the buyer and the seller or builder. Usually, purchase escrow periods range between 30 to 90 days. On refinance transactions, the process can take anywhere from 5 to 30 days depending on whether there are any special circumstances surrounding the transaction.
Is a fixed rate or adjustable rate mortgage better?
No one loan product is objectively better than another. The best mortgage for you depends on a variety of factors, including your financial situation and housing goals. Generally speaking, adjustable rate mortgages (ARMs) offer lower initial interest rates than fixed rate loans, but also have the potential to fluctuate every month, every six months, or every year, depending on the type of adjustable mortgage you get. An ARM therefore may be more attractive to homeowners who plan to sell their home in the timeframe before the adjustable rate surpasses a fixed-rate loan. On the other hand, homeowners who plan to remain in their home, or who want more stability in their rate and monthly payments, may find a longer-term 15, 20, or 30 year fixed rate more attractive. A fixed interest rate provides homeowners with a stable mortgage payment that does not change.
Annual Percentage Rate, or APR can be defined as the annual cost of a loan, expressed as a yearly rate. APR is designed to measure the “true cost of a loan,” and to prevent lenders from hiding fees from you. Although the rules to compute APR are not clearly defined, the fees it generally includes are pre-paid interest, points, origination fees, and private mortgage insurance ( PMI), so APR will be slightly higher than the actual interest rate on the loan. However, different lenders calculate APR differently, so you want to be careful when you are shopping for your loan to make sure you understand what fees are computed. It can be more practical for you to compare lenders by the interest rate they offer for the same loan type and term, and then compare the applicable points and total closing fees.
Loan-to-Value (LTV) refers to the amount of the loan as a percentage of the current market value of your home. You can calculate your LTV fairly easily by dividing your existing loan amount by current value of your home. For example, if you borrow $200,000 and your home is valued at $300,000, your loan to value is 66%. LTV is important when it comes to qualifying for a refinance loan, and will determine whether you will be required to get private mortgage insurance ( PMI) on your purchase or refinance transaction.
What is an escrow or impound account?
An escrow or impound account is set up by your lender during the loan closing to pay property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items on a monthly basis. Escrow accounts make sure that there is always enough money to pay these bills when they are due, and that these important payments are made on time. Escrow accounts also protect homeowners like you from having to come up with several large, lump sum payments at different times throughout the year.
What are Freddie Mac and Fannie Mae?
Mortgages made by lenders and banks are generally sold on the secondary market to produce cash so the lenders can make more mortgages. The largest purchasers on the secondary market are the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). These two organizations, called government-sponsored enterprises, or GSEs, were originally created by the government to make mortgages available to more people with low and moderate incomes, although both organizations are now privately run.
Freddie Mac and Fannie Mae have specific requirements for the loans they will purchase from banks and lenders, including a loan limit for single-family homes in the United States. Loans within this limit are the “conventional” or “conforming” loans you may hear about in the news.
What is the difference between a conforming and jumbo loan?
Conforming loans have a well-established secondary market which is provided by the two government sponsored entities, Freddie Mac and Fannie Mae. A jumbo loan is any loan that exceeds the conforming loan amounts and the rates for these loans are typically higher than for conforming loans.
What are the advantages of purchasing a home?
Buying a home gives you personal benefits such as a sense of buying a stake in your community, and pride for achieving the American dream of home ownership. However, there are some strong financial benefits as well.
One of the largest benefits of homeownership is the tax savings you receive. Interest payments on a home mortgage are 100% tax deductible (consult your tax advisor to learn more). And as you continue to pay your mortgage payment, you are building equity in your home, as opposed to a rent payment that goes into somebody else’s pocket. You build equity faster as the value of your home increases, and you can borrow against that equity to pay off debts, send your child to college, make home improvements, or take a much needed vacation. With today’s low or no down payment options, affording a home is a lot easier than you may think.
How much do I need for a down payment on a home?
Different companies offers a variety of different loan programs including first-time home buyer programs, and low or no down payment options. Imagine getting into your very own home with little or no money down!
Each loan program we offer has different rules about the down payment amount required. Down payments can also vary by the amount you want to borrow, as well as factors like credit history.
Should I get pre-qualified before looking for a property?
You don’t have to apply for a loan before looking for a property, but it’s a good idea to get pre-qualified or pre-approved for a home loan before you find a home to purchase. When you get pre-approved, you know ahead of time how much house you can afford, what you can expect your monthly payment to be, and how much money you will need for the down payment and settlement costs at closing. Also, many realtors will take your offer more seriously if you have been pre-approved.
Private mortgage insurance (PMI) is required for all loans that exceed 80% loan-to-value (LTV). If you put less than a 20% down payment on your purchase loan, you will likely be required to pay mortgage insurance until your LTV reaches 80% or below. Once you dip below 80% loan-to-value, you can refinance your home loan to eliminate the insurance.
Is it a good idea to refinance my home?
You may be tired of making one mortgage payment for your first mortgage, and another payment for your second mortgage. Perhaps it’s time to reduce your current interest rate to a lower fixed or adjustable rate, or maybe you have an adjustable rate that you want to convert into a fixed rate mortgage. You may want to cash out some of your equity, or lower your overall mortgage payment. Refinancing may also allow you to get rid of private mortgage insurance (PMI) if you now have 20% equity in your home.
Can I refinance for no cost or low cost?
Absolutely. With the wide variety of loan programs available at HomeLoanCenter.com, you may very well be able to refinance your existing loan at no cost or minimal cost to you. You will see immediate savings, and you won’t have to sacrifice your bank account or equity to get a great rate. Many people have taken advantage of our no cost refinance programs. Why shouldn’t you be one of them?
Is it worth refinancing if I only see a small change in my current rate?
A lower interest rate will save you money if you plan to stay in your home for more than a few years. You can use our mortgage calculator to see how much you will save by refinancing. However, even if you don’t pick a lower interest rate, refinancing can still save you money by allowing you to roll in higher interest debt, or giving you the flexibility of and interest-only option.
Can I eliminate PMI by refinancing?
If you meet two specific conditions, you may be able to remove mortgage insurance by refinancing your new home. You can qualify if you have made your mortgage payments on time every month for a specific time (usually a year), and you have reached a point of having 20% equity in your home, either through appreciation or paying down your mortgage.
Why would I choose an ARM over a fixed rate mortgage?
An Adjustable Rate Mortgage can be appealing because it offers you a lower interest rate than a conventional loan, which in turn means a lower monthly payment. An ARM may be a good match for you when you only expect to spend a few years in your home, or if you want to purchase a larger home than you could otherwise buy without this option.
Are low down payment options available for buyers who can’t afford a 20% down payment?
Although loans were available to people putting less than 20% down during the real estate boom of the late 1990’s and early 2000s, lenders have since become much more cautious. Even if you can afford high monthly mortgage payments and have a high credit score, you may have trouble finding a low (5% to 15%) or even no down payment loan — and the one you find will likely require you to pay a higher interest rate and loan fees (points) than if you’d made a larger down payment.
Also, if you put down less than 20%, you may have to either pay for private mortgage insurance (PMI) or, to avoid PMI, take out two separate loans (a first mortgage and a second mortgage).
What kinds of government loans are available to homebuyers?
Several federal, state, and local government financing programs are available to homebuyers. The two main federal programs are:
1. VA loans. U.S. Department of Veterans Affairs (VA) loans are available to men and women who are now in the military and to veterans with honorable discharges who meet specific eligibility rules, most of which relate to length of service. The VA doesn’t make mortgage loans, but guarantees part of the house loan you get from a bank, savings and loan, or other private lender. If you default, the VA pays the lender the amount guaranteed and you in turn will owe the VA. This guarantee makes it easier for veterans to get favorable loan terms with a low down payment. For more information, check the VA’s Website at www.va.gov or contact a regional VA office for advice.
2. FHA loans. The Federal Housing Administration (FHA), an agency of the Department of Housing and Urban Development (HUD), insures loans made to all U.S. citizens, permanent residents, and noncitizens with work permits who meet financial qualification rules. Under its most popular program, if the buyer defaults and the lender forecloses, the FHA pays 100% of the amount insured. This loan insurance lets qualified people buy affordable houses. The major attraction of an FHA-insured loan is that it requires a low down payment, usually about 3% to 5%. For more information on FHA loan programs, contact a regional office of HUD or check the FHA website at www.hud.gov.
For information on other government loans, contact your state and local housing offices. They often have programs available for first-time homebuyers who are purchasing modestly priced properties. To find your state housing office, check the State and Local Government on the Net Directory at http://statelocalgov.net. Or, go to your state’s home page, where you may find the listing for your state’s housing office.
Which is better — a fixed or adjustable rate mortgage?
It depends. Because interest rates and mortgage options change often, your choice of a fixed or adjustable rate mortgage should depend on:
* the interest rates and mortgage options available when you’re buying a house
* your view of the future (generally, high inflation will mean ARM rates will go up and lower inflation means that they will fall)
* your personal financial and investment goals, and
* how willing you are to take a risk.
When mortgage rates are low, a fixed rate mortgage is the best bet for many buyers. Over the next five, ten, or thirty years, interest rates are more apt to go up than further down. Even if rates could go a little lower in the short run, an ARM’s teaser rate will adjust up soon and you won’t gain much if you plan to stay in the house more than a few years (the broker can tell you your break-even point). In the long run, ARMs are likely to go up, meaning many buyers will be best off locking in a favorable fixed rate now and not taking the risk of much higher rates later.
Keep in mind that lenders not only lend money to purchase homes; they also lend money to refinance homes. For example, if you take out a fixed rate loan now, and several years from now interest rates have dropped, refinancing will probably be an option.
There are several downsides to refinancing. Unless you can negotiate a low-cost refi, you may have to pay the same fees and points as for an original mortgage. This means you may reduce your monthly payment right away but you may not actually begin to save money on the refi for several years — and you’ll probably extend the number of years that you’ll owe money for, assuming you start over with another 30-year mortgage. (Again, your broker can help you when run the numbers.) So, if you think you’ll be moving again soon, it may not make sense to refinance.
Second, if you default on a refinanced mortgage, your position under your state’s law can get worse. In California, for instance, when a homebuyer defaults (stops paying the mortgage) on a purchase mortgage, the lender can foreclose on the house but take nothing else from the homebuyer, while on a refinanced mortgage it can go after the homebuyer’s cash and other assets, after the house, to satisfy the debt.
Can I tap into my IRA or 401(k) plan for down payment money?
Let’s start with the IRAs. Under the 1997 Taxpayer Relief Act, certain homeowners can withdraw up to $10,000 penalty free from an individual retirement account (IRA) for a down payment to purchase a principal residence (though you might have to pay income tax on the amount withdrawn). If you’ve got a Roth IRA, however, you must have had the account for five years to make tax-free withdrawals.
This $10,000 is a lifetime limit — and the money must be used within 120 days of the date you receive it. The law limits use of this benefit to so-called “first-time homeowners” — but generously defines these as people who haven’t owned a house for the past two years. If a couple is buying a home, both must be first-time homeowners. Ask your tax accountant for more information, or check IRS rules at www.irs.gov. Also see Nolo’s article Getting Your Retirement Money Early — Without Penalty.
If you have a 401(k), you have two options. One is to do a so-called hardship withdrawal — but, because this would subject you to taxes and a 10% penalty, we recommend you avoid this.
You can also take an ordinary loan from your 401(k) plan without penalty, as long as you meet certain conditions and you promise to pay it back. Borrowing against your 401(k) offers several advantages:
* You, not a bank, receive the interest payments.
* The loan fees are usually less than what a bank would charge.
* The paperwork is less than would be required for a typical bank loan.
Keep in mind, however, that you’ll need to repay the loan with after-tax dollars, and you’ll forego the earnings on the 401(k) money you withdraw — until it is paid back.
Ask your employer or plan administrator whether your plan allows loans. If it does, the maximum loan amount under the law is one-half of your vested balance in the plan, or $50,000, whichever is less. (If, however, you have less than $20,000 in your plan, your limit is the amount of your vested balance, but no more than $10,000.) Other conditions, including the maximum term, the minimum loan amount, the interest rate, and the applicable loan fees, are set by your employer. Any loan must be repaid in a “reasonable amount of time,” although the Tax Code doesn’t define what is reasonable.
Be sure to find out what happens if you leave your job before fully repaying a loan from your 401(k) plan. If a loan becomes due immediately on your departure, income tax penalties may apply to the outstanding balance — but you may be able to avoid this hassle by repaying the loan before you leave the job.
