Mortgage FAQ

What are my options if I have no down payment or only a small down payment?

Some loans will do 100% financing. Another similar loan option is called a piggy-back loan where you get approved for the first and second mortgage at the same time. FHA loans require only 3% down. No matter which of these types of loans you obtain, the payment will be larger.  Your interest rate will probably be higher, and you will be required to buy private mortgage insurance (PMI).

What is private mortgage insurance (PMI)? Do I have to pay it?

If the bank or mortgage company determines that your loan is a risk they may require private mortgage insurance. This insurance serves to insulate the lender in the event that you default on your loan. It is possible that the fair market value of your house will not cover the full amount of money owed to the bank or mortgage company if you default. In such cases, private mortgage insurance reimburses the lender for the difference. Private mortgage insurance is usually required for borrowers that make a down payment of less than 20% or with poor credit scores.

What kinds of government loans are available to buyers?

HUD (US Department of Housing and Urban Development) is committed to increasing home ownership for minorities and low-income Americans. It oversees the FHA (Federal Housing Commission), offering a variety of programs including 203(K) loans to purchase a home that needs fixing up, financing for FHA-insured homes that have been acquired through foreclosure, and other FHA-insured loans. HUD has many programs to help in housing needs.

FHA loans (offered by the Federal Housing Commission) are the most popular. They don't actually make the loan; they guarantee loans requiring only a 3% down payment, and they do not have as strict credit policies as many conventional loans.

VA (Veteran's Administration) loans are really guarantees for loans obtained by certain qualified veterans or other qualifying home buyers or refinancers such as unmarried surviving spouses.

Can I get government loans?

The two primary Federal government financing programs for mortgages are VA loans and FHA loans. VA loans are not actually loans, but a guarantee from the federal government that should you default, the US Department of Veterans Affairs will pay the lender a certain amount of the defaulted loan. These loans are available to current members of the military and veterans with honorable discharges. FHA loans are available through the Department of Housing and Urban Development. These loans, like VA loans, guarantee that the Federal Housing Authority will pay the lender 100% of the insured amount of your mortgage should you default. You must meet certain criteria to qualify for an FHA loan.

What is the difference between a fixed rate mortgage (FRM) and an adjustable rate mortgage (ARM)?

A fixed rate mortgage has a set interest rate for the life of the loan. An adjustable rate mortgage has a specified adjusting period where the rate can be adjusted along with the payment.

Should I go with a fixed rate or an adjustable rate mortgage?

If current mortgage rates are low, it makes sense to opt for a fixed rate mortgage. Odds are, rates are going to increase at some point during the next 30 years. Securing a low rate now can insulate you from rate increases over the life of your mortgage. If current mortgage rates are high, an adjustable rate mortgage (ARM) may prove a better option should rates drop. Keep in mind, if you find in a few years that you could benefit from changes in mortgage rates, the option to refinance is available.

What is included in closing costs?

Closing costs will be about 3%-6% of your mortgage loan and commonly include:

Generally paid with application:

• Application Fee: a generally non-refundable fee to process the loan information
• Appraisal Fee: fee for an independent appraisal of the house (required by the lender) to establish market value to factor into the determination of the loan amount
• Credit Report Fee: a fee for the lender to obtain your credit report from one of the three recognized credit reporting bureaus (Equifax, TransUnion, and Experian). This report gives your credit history and a credit score which is used to determine qualifications and loan limits.

Generally paid at closing:

• Survey Fee: (may be required) a survey to verify property boundaries
• Flood Certification Fee: (may be required) a minimal fee to verify that the property is not in a flood zone
• Title Search Fee: a fee to obtain a history of the property to establish if there are any legal claims on the property
• Title Insurance: a lender's title insurance policy is required to protect the lender in getting the balance of the loan repaid; an owner's title insurance is also optional, protecting the buyer's investment
• Attorney Costs: paid for review of all documents needed to close your loan
• Recording and transfer charges: a small fee to record the purchase of your home
• Origination points: a percentage-of-the-loan amount charged as a fee for the lender's preparation of the loan
• Discount points: an optional percentage-of-the-loan amount paid to obtain a lower interest rate
• Escrow Accounts: (generally required) escrows for future fees that will be due related to the house, such as: Private Mortgage Insurance (required for loans financed at over 80% of value), Homeowner's Insurance (often called "Hazard" or "Fire Insurance"), property taxes, and sometimes, interest.

Is there any way to speed up the loan approval process?

• Become either pre-qualified (a preliminary analysis of your debt-to-income ratio) or pre-approved (NOT a loan guarantee, but rather an analysis of your credit report and income and a correlating maximum loan amount and interest options).  Pre-qualifications indicate that you are a more solid buyer. However, only a loan commitment is a guarantee that you will get the loan.
• Obtain a loan commitment (guaranteed under pre-set conditions) which will help speed up the loan process.
• Get your paperwork ready in advance.
• Check your credit score and clean up any old items. Have explanations for any remaining questions on your credit report.
• Gather any needed documentation such as personal identification, income verification and tax returns, employment history, and insurance commitments.
• Most important, when the loan officer asks for any information, always respond promptly.

What is the difference between a mortgage broker, a lender, and a loan officer?

A mortgage broker covers a broad basis, linking buyers with appropriate lenders, counseling borrowers, and even processing loans.

A lender is the institution or agency that will actually loan the money.

A loan officer is an employee of either a lender or a mortgage broker, generally finding borrowers, counseling, taking applications, and often, being involved in the loan processing.

What documents will be required to close a loan?

Each lender requires slightly different financial records, depending on the type and amount of the loan for which you are applying. However, there are some basic records all lenders will request. These include income records such as pay stubs for the previous 30 days, the last two years tax returns, 2 to 3 months of bank records for each bank account you own, and other documents that prove your income. You will also need to furnish information about your current debts such as account numbers and monthly payment information. 

Is it more expensive to rent or to own?

Owning a home is often considered the better deal, but keep these considerations in mind:

• Many home buyers do not build any equity in the first few years; the bank takes it all in interest, and many move before they begin building equity.
• Purchasers costs often increase due to mortgage interest adjustments, payment adjustments, increased property taxes, insurance premium increases, and maintenance costs.
• The tax break for owning a home only kicks in if the deductible expenses (such as interest) are higher than the standard deduction.
• There are other reasons that may make renting a better option:
  • Many maintenance and repair costs belong to the landlord.
  • Often relocation for job opportunities is easier without having the cost and hassle of reselling your home.
  • Renting can often provide convenient access to transportation, employment, retail, entertainment, and other common facilities.

Why do I need to check my credit prior to buying a house?

The lender will obtain a credit report. If you look at it prior to a loan application, you have a chance to clean up detrimental items before you have to explain them to the lender. Also, if your score is low, you can do specific things to increase your score such as paying down debt, increasing cash in the bank, and making payments consistently on time, over a period of time.

What is the difference between conforming and non-conforming loans?

Conforming loans are mortgage loans that meet specific, uniform national standards (most commonly referred to as Fannie Mae and Freddie Mac requirements) that deal with document specs, debt-to-income ratio limits, maximum loan amounts, and interest rates.

Non-conforming loans are loans that do not meet banking qualifications generally due to borrower's financial status or property that does not meet required criteria. These types of loans are funded by private money and usually have a much higher interest rate than conforming loans. Loans that exceed Fannie Mae limits are called "Jumbo" loans.

Where do the names Fannie Mae and Freddie Mac (loan regulating entities) originate?

The Fannie Mae entity was created in 1938 under President Franklin D. Roosevelt to help the home buying economy which was floundering at that time. In 1968, Freddie Mac was chartered to provide competition. These are not government funded entities, only government sponsored with the idea of creating national standards and guidelines to ensure a long-term healthy housing market.

They operate by borrowing foreign, low-interest money that, in turn, allows them to provide local banks with money to offer affordable housing loans. Together these two entities control about 90% of the secondary mortgage market.

They were dubbed these names from the acronyms of their respective government sponsored entities:

• Federal National Mortgage Association (FNMA): Fannie Mae
• Federal Home Loan Mortgage Corporation (FHLMC): Freddie Mac

What are points?

Points are a fee that is expressed as a percentage of the loan amount: one point is 1% of the loan amount.

Origination points are charged as a fee for some of the costs of the loan processing.

Discount points are basically a prepaid interest, or a fee to reduce the interest rate, known as a rate "buy down."