The
Following Information Is From U.S. Department of Housing
and Urban Development
GENERAL FINANCING QUESTIONS: THE BASICS
13. WHAT IS A MORTGAGE?
Generally speaking, a
mortgage is a loan obtained to purchase real estate. The
"mortgage" itself is a lien (a legal claim) on the home or
property that secures the promise to pay the debt. All
mortgages have two features in common: principal and
interest.
14. WHAT IS A LOAN TO VALUE (LTV) HOW
DOES IT DETERMINE THE SIZE OF ME LOAN?
The loan to value ratio is
the amount of money you borrow compared with the price or
appraised value of the home you are purchasing. Each loan
has a specific LTV limit. For example: With a 95% LTV loan
on a home priced at $50,000, you could borrow u to $47,500
(95% of $50,000), and would have to pay,$2,500 as a down
payment.
The LTV ratio reflects the
amount of equity borrowers have in their homes. The higher
the LTV the less cash home buyers are required to payout of
their own funds. So, to protect lenders against potential
loss in case of default, higher LTV loans (80% or more)
usually require mortgage insurance policy.
15. WHAT TYPES OF LOANS ARE AVAILABLE
AND WHAT ARE THE ADVANTAGES OF EACH?
Fixed Rate Mortgages:
Payments remain the same for the the life of the loan
Types
 |
15-year |
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30-year |
Advantages
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Predictable |
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Housing cost remains
unaffected by interest rate changes and inflation.
|
Adjustable Rate Mortgages
(ARMS): Payments increase or decrease on a regular
schedule with changes in interest rates; increases subject
to limits
Types
Advantages
|
|
Generally offer lower
initial interest rates |
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Monthly payments can
be lower |
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May allow borrower to
qualify for a larger loan amount |
16. WHEN DO ARMS MAKE SENSE?
An ARM may make sense If you
are confident that your income will increase steadily over
the years or if you anticipate a move in the near future
and aren't concerned about potential increases in interest
rates.
17. WHAT ARE THE ADVANTAGES OF 15- AND
30-YEAR LOAN TERMS?
30-Year:
|
|
In the first 23 years
of the loan, more interest is paid off than principal,
meaning larger tax deductions. |
|
|
As inflation and costs
of living increase, mortgage payments become a smaller
part of overall expenses. |
15-year:
|
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Loan is usually made
at a lower interest rate. |
|
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Equity is built faster
because early payments pay more principal. |
18. CAN I PAY OFF MY LOAN AHEAD OF
SCHEDULE?
Yes. By sending in extra
money each month or making an extra payment at the end of
the year, you can accelerate the process of paying off the
loan. When you send extra money, be sure to indicate that
the excess payment is to be applied to the principal. Most
lenders allow loan prepayment, though you may have to pay
a prepayment penalty to do so. Ask your lender for
details.
19. ARE THERE SPECIAL MORTGAGES FOR
FIRST-TIME HOMEBUYERS?
Yes. Lenders now offer
several affordable mortgage options which can help
first-time home buyers overcome obstacles that made
purchasing a home difficult in the past. Lenders may now
be able to help borrowers who don't have a lot of money
saved for the down payment and closing costs, have no or a
poor credit history, have quite a bit of long-term debt,
or have experienced income irregularities.
20. HOW LARGE OF A DOWN PAYMENT DO I
NEED?
There are mortgage options
now available that only require a down payment of 5% or
less of the purchase price. But the larger the down
payment, the less you have to borrow, and the more equity
you'll have. Mortgages with less than a 20% down payment
generally require a mortgage insurance policy to secure
the loan. When considering the size of your down payment,
consider that you'll also need money for closing costs,
moving expenses, and - possibly -repairs and decorating.
21. WHAT IS INCLUDED IN A MONTHLY
MORTGAGE PAYMENT?
The monthly mortgage payment
mainly pays off principal and interest. But most lenders
also include local real estate taxes, homeowner's
insurance, and mortgage insurance (if applicable).
22. WHAT FACTORS AFFECT MORTGAGE
PAYMENTS?
The amount of the down
payment, the size of the mortgage loan, the interest rate,
the length of the repayment term and payment schedule will
all affect the size of your mortgage payment.
23. HOW DOES THE INTEREST RATE FACTOR
IN SECURING A MORTGAGE LOAN?
A lower interest rate allows
you to borrow more money than a high rate with the some
monthly payment. Interest rates can fluctuate as you shop
for a loan, so ask-lenders if they offer a rate "lock-in"which
guarantees a specific interest rate for a certain period
of time. Remember that a lender must disclose the Annual
Percentage Rate (APR) of a loan to you. The APR shows the
cost of a mortgage loan by expressing it in terms of a
yearly interest rate. It is generally higher than the
interest rate because it also includes the cost of points,
mortgage insurance, and other fees included in the loan.
24. WHAT HAPPENS IF INTEREST RATES
DECREASE AND I HAVE A FIXED RATE LOAN?
If interest rates drop
significantly, you may want to investigate refinancing.
Most experts agree that if you plan to be in your house
for at least 18 months and you can get a rate 2% less than
your current one, refinancing is smart. Refinancing may,
however, involve paying many of the same fees paid at the
original closing, plus origination and application fees.
25. WHAT ARE DISCOUNT POINTS?
Discount points allow you to
lower your interest rate. They are essentially prepaid
interest, With each point equaling 1% of the total loan
amount. Generally, for each point paid on a 30-year
mortgage, the interest rate is reduced by 1/8 (or.125) of
a percentage point. When shopping for loans, ask lenders
for an interest rate with 0 points and then see how much
the rate decreases With each point paid. Discount points
are smart if you plan to stay in a home for some time
since they can lower the monthly loan payment. Points are
tax deductible when you purchase a home and you may be
able to negotiate for the seller to pay for some of them.
26. WHAT IS AN ESCROW ACCOUNT? DO I
NEED ONE?
Established by your lender,
an escrow account is a place to set aside a portion of
your monthly mortgage payment to cover annual charges for
homeowner's insurance, mortgage insurance (if applicable),
and property taxes. Escrow accounts are a good idea
because they assure money will always be available for
these payments. If you use an escrow account to pay
property tax or homeowner's insurance, make sure you are
not penalized for late payments since it is the lender's
responsibility to make those payments.
FIRST STEPS
27.
WHAT STEPS NEED TO BE TAKEN TO SECURE A LOAN?
The first step in securing a
loan is to complete a loan application. To do so, you'll
need the following information.
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Pay stubs for the past
2-3 months |
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W-2 forms for the past
2 years |
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Information on
long-term debts |
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Recent bank statements
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tax returns for the
past 2 years |
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Proof of any other
income |
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Address and
description of the property you wish to buy |
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Sales contract |
During the application
process, the lender will order a report on your credit
history and a professional appraisal of the property you
want to purchase. The application process typically takes
between 1-6 weeks.
28. HOW DO I CHOOSE THE RIGHT LENDER
FOR ME?
Choose your lender
carefully. Look for financial stability and a reputation
for customer satisfaction. Be sure to choose a company
that gives helpful advice and that makes you feel
comfortable. A lender that has the authority to approve
and process your loan locally is preferable, since it will
be easier for you to monitor the status of your
application and ask questions. Plus, it's beneficial when
the lender knows home values and conditions in the local
area. Do research and ask family, friends, and your real
estate agent for recommendations.
29. HOW ARE PRE-QUALIFYING AND
PRE-APPROVAL DIFFERENT?
Pre-qualification is an
informal way to see how much you maybe able to borrow. You
can be 'pre-qualified' over the phone with no paperwork by
telling a lender your income, your long-term debts, and how
large a down payment you can afford. Without any obligation,
this helps you arrive at a ballpark figure of the amount you
may have available to spend on a house.
Pre-approval is a lender's
actual commitment to lend to you. It involves assembling the
financial records mentioned in Question 47 (Without the
property description and sales contract) and going through a
preliminary approval process. Pre-approval gives you a
definite idea of what you can afford and shows sellers that
you are serious about buying.
30. HOW CAN I FIND OUT INFORMATION
ABOUT MY CREDIT HISTORY?
There are three major
credit reporting companies: Equifax, Experian, and Trans
Union. Obtaining your credit report is as easy as calling
and requesting one. Once you receive the report, it's
important to verify its accuracy. Double check the "high
credit limit, "total loan," and 'past due" columns. It's a
good idea to get copies from all three companies to assure
there are no mistakes since any of the three could be
providing a report to your lender. Fees, ranging from
$5-$20, are usually charged to issue credit reports but some
states permit citizens to acquire a free one. Contact the
reporting companies at the numbers listed for more
information.
CREDIT REPORTING COMPANIES
| Company
Name |
Phone
Number |
| Experian |
1-888-524-3666 |
| Equifax |
1-800-685-1111 |
| Trans
Union |
1-800-916-8800 |
31. WHAT IF I FIND A MISTAKE IN MY
CREDIT HISTORY?
Simple mistakes are easily
corrected by writing to the reporting company, pointing out
the error, and providing proof of the mistake. You can also
request to have your own comments added to explain problems.
For example, if you made a payment late due to illness,
explain that for the record. Lenders are usually
understanding about legitimate problems.
32. WHAT IS A CREDIT BUREAU SCORE AND
HOW DO LENDERS USE THEM?
A credit bureau score is a
number, based upon your credit history, that represents the
possibility that you will be unable to repay a loan. Lenders
use it to determine your ability to qualify for a mortgage
loan. The better the score, the better your chances are of
getting a loan. Ask your lender for details.
33. HOW CAN I IMPROVE MY SCORE?
There are no easy ways to
improve your credit score, but you can work to keep it
acceptable by maintaining a good credit history. This means
paying your bills on time and not overextending yourself by
buying more than you can afford.
FINDING THE RIGHT LOAN FOR YOU
34.
HOW DO I CHOOSE THE BEST LOAN - PROGRAM FOR ME?
Your personal situation
will determine the best kind of loan for you. By asking
yourself a few questions, you can help narrow your search
among the many options available and discover which loan
suits you best.
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Do you expect your
finances to changeover the next few years? |
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Are you planning to
live in this home for a long period of time? |
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Are you comfortable
with the idea of a changing mortgage payment amount?
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Do you wish to be free
of mortgage debt as your children approach college age
or as you prepare for retirement? |
Your lender can help you
use your answers to questions such as these to decide which
loan best fits your needs.
35. WHAT IS THE BEST WAY TO COMPARE
LOAN TERMS BETWEEN LENDERS?
First, devise a checklist
for the information from each lending institution. You
should include the company's name and basic information, the
type of mortgage, minimum down payment required, interest
rate and points, closing costs, loan processing time, and
whether prepayment is allowed.
Speak with companies by
phone or in person. Be sure to call every lender on the list
the same day, as interest rates can fluctuate daily. In
addition to doing your own research, your real estate agent
may have access to a database of lender and mortgage
options. Though your agent may primarily be affiliated with
a particular lending institution, he or she may also be able
to suggest a variety of different lender options to you.
36. ARE THERE ANY COSTS OR FEES
ASSOCIATED WITH THE LOAN ORIGINATION PROCESS?
Yes. When you turn in your
application, you'll be required to pay a loan application
fee to cover the costs of underwriting the loan. This fee
pays for the home appraisal, a copy of your credit report,
and any additional charges that may be necessary. The
application fee is generally non-refundable.
37. WHAT IS RESPA?
RESPA stands for Real
Estate Settlement Procedures Act. It requires lenders to
disclose information to potential customers throughout the
mortgage process, By doing so, it protects borrowers from
abuses by lending institutions. RESPA mandates that lenders
fully inform borrowers about all closing costs, lender
servicing and escrow account practices, and business
relationships between closing service providers and other
parties to the transaction.
For more information on
RESPA, or call 1-800-217-6970 for a local counseling
referral.
38. WHAT IS A GOOD FAITH ESTIMATE, AND
HOW DOES IT HELP ME?
It's an estimate that lists
all fees paid before closing, all closing costs, and any
escrow costs you will encounter when purchasing a home. The
lender must supply it within three days of your application
so that you can make accurate judgments when shopping for a
loan.
39. BESIDES RESPA, DOES THE LENDER
HAVE ANY ADDITIONAL RESPONSIBILITIES?
Lenders are not allowed to
discriminate in any way against potential borrowers. If you
believe a lender is refusing to provide his or her services
to you on the basis of race, color, nationality, religion,
sex, familial status, or disability, contact HUD's Off ice
of Fair Housing at 1-800-669-9777 (or 1-800-927-9275 for the
hearing impaired).
40. WHAT RESPONSIBILITIES DO I HAVE
DURING THE LENDING PROCESS?
To ensure you won't fall
victim to loan fraud, be sure to follow all of these steps
as you apply for a loan:
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Be sure to read and
understand everything before you sign. |
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Refuse to sign any
blank documents. |
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Do not buy property
for someone else. |
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Do not overstate your
income. |
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Do not overstate how
long you have been employed. |
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Do not overstate your
assets. |
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Accurately report your
debts. |
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Do not change your
income tax returns for any reason. Tell the whole truth
about gifts. Do not list fake co-borrowers on your loan
application. |
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Be truthful about your
credit problems, past and present. |
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Be honest about your
intention to occupy the house |
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Do not provide false
supporting documents. |
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