Mortgage/Lender Questions

Hopefully the following Mortgage Information FAQ (Frequently Asked Questions) will help you. If you have further questions, please e-mail me so that I may put you in touch with a lender for professional advice.

What payment can I qualify for?
You can usually qualify for a payment of 28% of your monthly "gross" income assuming you have an average debt load (approximately 8-12%) of monthly gross income. The home price and loan amount will change based on the loan program and interest rate, therefore it is more accurate to "pre-qualify" based on a payment amount that includes taxes and insurance.

What if I've had credit problems?
You need to explain the circumstances. If you have overcome the problem and maintained your obligations on a timely basis for a year or more, you should be an acceptable credit risk. Poor credit is normally habitual delinquencies without a valid reason. If you have been declined for credit cards do NOT assume that you will be declined for a mortgage loan.

What is the difference between a conventional loan and an FHA loan?
A conventional loan requires you to place a minimum down payment of 5% of the selling price of the home you want to buy. However, with loans insured by Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA), you can qualify for a mortgage with a smaller down payment, or even no money down.

What is "PMI"?
Private Mortgage Insurance may allow you, even if you do not qualify for an FHA-insured or VA-guaranteed loan, to purchase a home for as little as 5% down. Such coverage requires a monthly insurance fee to be paid, or in some cases, a one-time premium can be paid at closing.

Who are "Fannie Mae", "Freddie Mac" and "Ginnie Mae"?

These are the colloquial terms for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corp. (FHLMC), and Government National Mortgage Assoc. (GNMA), institutions incorporated by Congress which buys and sells conventional residential mortgages, as well as some FHA-insured and VA-guaranteed mortgages.

"Freddie Mac" is the Federal Home Loan Mortgage Corporation (FHLMC), an agency that purchases mortgages from insured savings institutions and HUD-approved mortgage bankers.

The Government National Mortgage Association (GNMA)-- "Ginnie Mae" -- funds residential mortgages insured through the FHA or guaranteed by the VA.

What is the difference between fixed rate mortgages and adjustable rate mortgages?
The differences are as follows:

Fixed rate mortgages are offered with an interest rate that remains unchanged for the term of the loan.

Adjustable rate mortgages -- sometimes referred to as ARMs or variable rate mortgages -- have rates that change at predetermined intervals during the term to reflect prevailing interest rates.

What is a "convertible mortgage"?
This is a mortgage that allows a borrower to convert from an adjustable rate to a fixed rate during specified time periods. An extra fee usually applies.

What is an "adjustment interval"?
This is the time between changes in the interest rate and/or the monthly payment on an adjustable rate mortgage.

What is "amortization"?
Amortization is the division of principal and total interest charges into equal payments that will result in the complete payment of the debt by the end of a fixed period of time. The lower the rate the faster the principal balance will decrease in the first years of the loan.

What are "points"?
Points (sometimes called "loan discount points") are pre-paid interest on your mortgage, charged at closing. Each point is equal to 1% of the mortgage amount. If you plan to stay in a home for more than 4 or 5 years and prefer a fixed rate loan, it is a good idea to consider "buying" your rate lower. I would be happy to help you understand this concept in more detail.

What does "APR" stand for?
This stands for Annual Percentage Rate and reflects the annual cost of the mortgage, taking into account "points" and other credit costs. The APR can be used to compare the annual cost of different types of mortgage loans, but be careful. This topic coincides with "points", as discussed above, and may be misleading if you are planning a short stay in your home.

What is an "index"?
An "index" is a financial reference rate on which a lender bases mortgage and other loan rates. Typical indices include the rate of return on U.S. Treasury bills or the monthly average interest rate on loans closed by savings and loan associations. As this rate varies, so will your mortgage rate, at the predetermined adjustment periods.

What is a "buy-down"?
A temporary "buy-down" occurs when a lender lowers the interest rate on a mortgage for the first few years of the loan. A permanent "buy-down" buys the rate down for the life of the loan. The cost for these are called "fees" or "points".

What are "caps"?
"Caps" are limits that are placed on the changes allowed in the interest rate and/or monthly payment on an adjustable rate mortgage. There are annual "caps" and a lifetime "cap" that is a rate that can never be exceeded.

What is "locking-in"?
"Locking-in" means that the lender will guarantee the interest rate on your mortgage for a limited period, regardless of fluctuations in market rates during the loan processing period. If you are concerned that rates will go up between the time you apply and the time the loan closes, you should lock-in. Some banks offers a lock-in with an option to "float down" if the rates are lower at closing. There is usually a cost either at the beginning or end for this option.

What is "PITI"?
It stands for "Principal, Interest, Taxes and Insurance" that comprise your total monthly mortgage payment. With larger down payments you may be allowed to pay only the PI, principal & interest monthly and pay your own tax and insurance.

What is an appraisal?
An estimate of the value of the property you intend to buy or refinance. This is required by the lender to be assured the value of the home is adequate to cover the loan request.

What is Closing?
"Closing" is the date set when the buyer, seller and lender, or their agents, agree to legally transfer the property and all associated funds, or refinance the property.

What is Escrow?
"Escrow" is the process wherein a neutral, third-party is responsible for carrying out the buyer's and seller's instructions and paperwork relating to closing. Escrow can also refer to an account set up by the mortgage lender into which a portion of each mortgage payment is deposited to cover insurance and taxes, or an account set up to hold funds for needed repairs.

What are "closing costs"?
"Closing costs" are those "One Time" costs that include the mortgage broker's fee, discount points, appraisal and title search fees, insurance charges, survey fees and other charges associated with the legal transfer of the property.

What are "pre-paid expenses"?
"Pre-paid expenses" are the recurring costs that are not associated with the cost of the loan or transfer of property, such as Homeowner's insurance premium, property taxes, on-going private mortgage insurance, and the amount that needs to be set aside at closing to pay those expenses when they next recur.

What happens at closing?
This is also called the "settlement". The buyer, seller and lender -- or their agents -- meet and legally transfer the property and all associated funds.

What happens if I'm late with a payment or miss a payment?
Continued delinquency (late payment) or defaulting on the mortgage (failing to make one or more payments) can lead to foreclosure, or judgment against you on the note for the amount owed.

What is "foreclosure"?
"Foreclosure" is a legal action undertaken by a lender to sell a mortgaged property in order to pay a defaulting borrower's debt.

What is a "prepayment penalty"?
You may be penalized if you pay off the loan prior to the end of a set term. Some mortgages do have a prepayment penalty, but most do not. It is most commonly found in the "No Cost" loans being offered, where the lender is looking for their profit to come in the form of a higher rate over a period of time.