Mortgage Loan FAQ - Frequently Asked Questions
Why buy a home?
Why use a Realtor?
What are the benefits of homeowner's insurance?
What are closing costs?
What is PMI (private mortgage insurance) and why do I have to pay for it?
What is a credit score?
What sources are acceptable for a down payment?
What is the APR (annual percentage rate) and how is it calculated?
Why can interest rates change daily?
How can I improve my credit score?
How can I determine my housing needs before I begin looking for a home?
What is LTV (loan to value) and how is it used to determine the size of my loan?
Are there special mortgage programs for first time home buyers?
How large of a down payment do I need to get a loan?
What factors have an impact on my mortgage payment?
How are "pre-qualify" and "pre-approval" different?
Why buy a home?
Homeownership has many advantages including:
Making a monthly mortgage payment serves as a savings plan. Over time, you build equity in your property that can be borrowed against or converted into cash when you sell. Tenants paying rent never have the opportunity to build equity.
Over time, your house can significantly increase in value making it one of your best investments. The equity you build by appreciation can be used as a down payment if you wish to move up to a larger home.
Great Tax Advantages
You can save a substantial amount on your federal income taxes because your mortgage interest and real estate taxes are deductible. People who rent are not eligible for the same deductions.
Security and Satisfaction
Home ownership offers the security of knowing you own your home and typically keeps your housing costs stable. Your landlord no longer controls your housing expense. Owning a home has been described by many as the American Dream.
While housing costs may seem high, it may be an even greater risk not to buy. The home that you purchase today may cost much more in the future due to inflation, appreciation or rising interest rates.
If you've been thinking of purchasing a home in the next three to six months, you may have some concerns about your ability to buy. You are not alone. Many people postpone buying a home for various reasons. The most common reasons are a lack of down payment, concerns about credit problems or just not knowing if you qualify.
Our Mortgage Consultants at AmeriFirst Home Mortgage are here to help. We work with a variety of individuals in every type of economic situation. Contact one of our Mortgage Professionals today to begin the process to owning your own home!
Why should you consider using a Realtor?
You have many decisions to make in the home buying process and sometimes a limited amount of time to make them. Selecting a professional Realtor can be an invaluable asset in obtaining your dream home. Your real estate professional:
- Helps you assess your wants and needs to find the perfect match between what you can afford and the home that best suits your needs.
- Keeps your personal style in mind when selecting properties to show you.
- Accesses all the properties listed for sale in your desired area by computer. For Sale signs and newspaper ads are not always a complete reflection of everything that is on the market. Your real estate agent knows what is available.
- Negotiates for you. If you choose to have the agent represent you as a buyers' agent, the Realtor is working for you and will look out for your best interests. Once you have found the home you want to buy, your Realtor will write up an offer and present it to the seller.
- Gets the right price. Your Realtor is a specialist in your area and knows the market which helps you get the best possible price.
- Allows you to make your own decision. A professional agent works for you and respects your opinion. They will not try to force you into a decision you aren't comfortable with.
- Protects your rights. Real estate laws have become increasingly more complicated. The professional Realtor takes continuing education classes to stay abreast of the changes.
- Doesn't charge you anything. Your Realtor's services are absolutely free of charge to you. Their commission is paid by the seller.
Why do you need homeowner's insurance?
A home is often a person's largest asset and protecting it properly can be complicated. The unexpected can threaten peoples' homes or possessions and compromise them financially, making homeowners insurance an important consideration. Insurance.com developed the following guidelines to ease the process of choosing the right insurance for new homebuyers. First time homebuyers may not realize that homeowners insurance covers more than just the structure of a house. It also protects the homeowner and generally anyone named on the policy, including a spouse, resident, household employee, guest or visitor. Most policies offer three kinds of protection:
- Structures - A homeowners policy protects a person's dwelling for damage due to common threats like fire and smoke, lightning, theft and extreme weather. Unless it is listed among a policy's exclusions, anything that causes loss to a homeowner or his property is covered. To cover the exclusions, homeowners can often pay to add endorsements to their policy. However, some exclusions such as flood damage may require the purchase of a separate policy.
- Personal Property - Family possessions and personal property are also covered by homeowners insurance. In most cases, a policyholder will be reimbursed for damage or theft of personal property whether the loss occurs on the protected premises or elsewhere. Recalling each item can be difficult, so policy holders are encouraged to make an inventory of their belongings. This includes recording the serial numbers, as well as the dates and cost of purchases for possessions such as jewelry, artwork, furniture and appliances. Personal inventories should always be stored in a fireproof safe or away from the premises, such as on videotape or a computer that is not in the house.
- Liability - Homeowners insurance also provides compensation for liability claims and medical expenses as well as other claims that result from property damage and personal injury suffered by others. This coverage applies whether an accident occurs on the policyholder's property or while away from home.
After establishing a policy, homeowners should periodically review their existing coverage to make sure that it keeps pace with any major purchases or improvements they make to their homes. Securing the right insurance policy at the right price is an important step in the home buying process, so homebuyers should shop around for a policy that best suits their needs and protects their most valuable asset appropriately.
What are closing costs?
These are costs that are incurred to obtain your mortgage and are paid to third parties for services they provide us in order to get your mortgage approved and closed. The following are the most typical closing costs and how they are determined.
Origination Fee - This is a percentage of your mortgage amount and is typically required when obtaining an FHA mortgage. An origination fee is sometimes charged on conventional, other government programs and non-conforming mortgages as well.
Discount Points - One discount point is equal to one percent of your mortgage amount. Discount points are an additional cost to you and are typically optional. In most instances, discount points lower your mortgage interest rate.
Appraisal Fee - An appraisal must be ordered for each mortgage application. The appraiser's job is to verify that the value of your new home is at least equal to the sales price by comparing it to similar homes nearby that have sold recently. One of the factors in our underwriting decision is the value and condition of the home. You are given a copy of the appraisal after closing.
Credit Report - We must obtain a residential mortgage credit report which checks the three repositories - Experian, Transunion and Equifax. The price of the credit report is determined by a number of factors; whether you are married or single, whether supplements are ordered to provide additional verification in case of a discrepancy on the credit report, etc.
Underwriting Fee - The underwriting fee is charged by the lender that we choose to send your mortgage to for approval and can vary in cost due to the different lender fee schedules.
Tax Service Fee - This is a one time fee that is good for the life of your loan. Each year, a third party will verify that the tax payment has been applied correctly to your property.
Closing Fee - The closing fee is paid to the title company for handling the closing of your transaction and for properly transferring title from sellers to buyers when you are purchasing a home. When refinancing, the title company is responsible for disbursing your funds and paying off your old mortgage. The title company is also responsible for recording all of the pertinent documents from your closing with the Register of Deeds.
Document Preparation - This is for the preparation of all of your closing documents.
Title Insurance - We must order a title search when you purchase or refinance your home. The cost for the title commitment is based on your mortgage amount. The title company does a title search through county public records to see what liens are on the property and to verify that the property taxes are paid. When you are purchasing a new home, you will be given clear title to your new property at the closing. When you are refinancing, you are already in title, but they must verify all liens are paid.
Recording Fees - There are a few documents that you sign at your closing which must be recorded with the Register of Deeds. The Register of Deeds charges for recording these documents so they are always on public record.
Survey - A survey is a blueprint of your lot lines and is ordered from a surveying company. A survey is required on a property if boundary disputes are suspected. The survey would show us what kind of easements you have on your new property, and if any of your surrounding neighbors' driveway, fence, garage, etc. is encroaching over onto your property. Most new mortgages do not require a survey.
Escrow Waiver Fee - An escrow waiver is an option when you are putting a 20% or more down payment toward the purchase of your new home, or if you have at least 20% equity in your home when you are refinancing. Having an escrow waiver means that you are responsible for paying your homeowners insurance and property taxes every year instead of including them in your house payment every month.
Flood Certification Fee - We used to depend on appraisers to verify your property's flood zone. However, there is too much risk involved, so each mortgage company is required to have a flood certification company verify the flood zone of your new property.
Courier Fee - This may be charged if the title company has to hand deliver your documents to the Register of Deeds for recording purposes or overnight express your payoff on a refinance.
Private Mortgage Insurance - What is it and why do I have to pay for it?
Private Mortgage Insurance (PMI) is a form of insurance designed to protect mortage lenders against financial losses due to foreclosure. Please do not confuse PMI with Credit Life or Credit Disability Insurance, which is designed to pay off your mortgage in the event of one's loss of employment due to injury or the death of a spouse.
PMI allows you to purchase a new home with less than a 20% down payment. It allows mortgage lenders to accept lower down payments, and is an excellent avenue for getting into your dream home with limited funds available. Nearly half of all borrowers put less than 20% down when buying a home.
PMI should be considered a short term expense due to the expected appreciation of your home. When your home increases in value over a period of time, and your mortgage balance lowers, you will have an increase in your home's equity. PMI can be removed from your mortgage after the following criteria are followed:
- The date the principal balance of your mortgage actually reaches 80% of the original value of the property.
"Original Value" means the lesser of the contract sales price of the property or the appraised value of the property at the time the loan was closed. If this loan refinances an existing loan secured by the property, "Original Value" means the appraised value relied on by the lender to approve this loan.
PMI will only be cancelled if all of the following conditions are satisfied:
- you submit a written request for cancellation
- you have a good payment history
- you are current on the payment required by your loan
- we receive, if requested and at your expense, evidence satisfactory to the holder of your loan that the value of the property has not declined below its original value and certification that there are no subordinate liens on the property.
A "good payment history" means no payments 60 or more days past due within two years and no payments 30 or more days past due within one year of the later of (a) the cancellation date, or (b) the date you submit a request for cancellation.
The key factor in utilizing Private Mortgage Insurance is that it allows you to put a smaller down payment on your new home and any other funds can be used toward paying off debts, making investments, or buying some new furniture. Please note that removing PMI is at the lender's discretion.
What is a credit score?
A credit score is a three digit numeric rating that tells a lender how likely you are to repay a loan or make credit payments on time. The most widely used score was developed by Fair Isaac and Company. It is referred to as a FICO score.
The FICO score is determined by evaluating the five main categories of information contained in your credit report. The categories are as follows:
Payment History - What is your track record? Approximately 35% of your score is based on this category
- Payment information on accounts such as credit cards, retail accounts, installment loans, finance company loans and mortgages
- Public records and collection items - reports of events such as bankruptcies, judgments, suits, liens and collections
- Details on late or missed payments - specifically, how late they were
- How many accounts show no late payments
Amounts Owed - How much is too much? Approximately 30% of your score is based on this category
- Amount owed on all accounts
- The amount owed on different types of accounts.
- Whether you are showing a balance on certain types of accounts
- How many accounts have balances
- How much of the total credit line is being used on credit cards and other revolving credit accounts
- How much of installment loan accounts are still owed compared to original loan amounts.
Length of Credit History - How established is yours? Approximately 15% of your score is based on this category
- How long credit accounts have been established
- How long have specific accounts been established
- How long has it been since you used certain accounts
New Credit - Are you taking on more debt? Approximately 10% of your score is based on this category
- How many new accounts you have
- How long it has been since you opened a new account
- How many recent requests for credit have you made
- Length of time since credit inquiries were made by lenders
Types of credit in use - Is it a healthy mix? Approximately 10% of your score is based on this category
- What kinds of accounts do you have and how many of each
Where can I find money for a down payment?
These are just a few suggestions of how to obtain money for the down payment on your new home:
- Get a tax-free gift - Do you know anyone who can give you a gift? Any taxpayer is permitted to give up to $10,000 per year to another person without having to pay a gift tax. A gift is documented with a letter stating that no repayment is required. Children are permitted to receive up to $10,000 from each parent (for a total of $20,000) in a one year period without having to pay taxes. A couple could get gifts up to $40,000 from four parents all income tax free. Most lenders require that at least a portion (typically 3% to 5% of the sales price) of the down payment be your own money in addition to the gift funds.
- Use a tax refund - Are you anticipating an income tax refund? If so, you can use it as a part of your down payment. You can also raid other sources - coins in a jar, the savings bond Grandma gave you and so on.
- Sell an asset - Do you have any property that can be sold to increase the amount of money you have available? Real estate, collectibles, jewelry, antiques, vehicles, boats, trailers, etc. are things you may own that can be sources of fast cash. Borrowing against an asset may also be an option if you qualify with the additional debt. Before choosing one of these options, consult your Loan Originator so the transaction can be properly documented.
- Ask the seller to help - Motivated sellers often find it advantageous to offer special incentives to buyers. Your real estate agent can negotiate on your behalf to have the seller pay for all or a portion of your closing costs when you make an offer on a home. And, if the seller does not need all of the equity in his/her property, having them carry some of the financing can reduce the amount of your down payment.
- Liquidate or borrow against securities - Selling securities such as stocks and bonds are yet another option. You could also consider liquidating a mutual fund or cracking open a CD. Borrowing against securities is also a possibility. Financial assets held by a bank or brokerage can be used as collateral for a loan and because it is secured, the rate is usually lower than that on personal loans. Many people use margin loans to buy securities, but if you have a brokerage account, you can use the money for anything you want. This can be a better alternative than selling if you qualify with the debt since there are not tax implications, you hold on to a good investment and you may be more likely to be disciplined about paying back a margin loan than saving to replace your investment.
- Look at your life insurance - Does your life insurance policy have some cash value? If so, you may be able to borrow from 75% to 95% of the cash value that is built up. Repayment terms are usually liberal and often money that isn't paid back will simply be deducted from your death benefit. Ask your agent to show you in writing how your dividends and future cash values will be affected by the loan and what impact that will have on your premiums over the years. Some insurers reduce the interest or dividend they pay of the assets in your policy if you have an outstanding loan, so it's important to check first.
- Tap into your 401(k) or 403(b) - You can also access your 401(k) either by borrowing against it or withdrawing cash. Each option should be weighted carefully before making a decision - this is your retirement money after all. Most experts agree however, that if you are taking money out for a home purchase, tapping into your 401(k) or 403(b) can be a good choice. About 75% of companies with 401(k) plans let you borrow against money in their plans. You can usually access up to 50% of your vested balance or $50,000, whichever is less, and the interest rate is often lower than the rates that banks are charging for loans. Most plans require that the money be paid back within 5 years, but in the case of a home purchase, that may be extended anywhere from 10 to 30 years. What's the best thing about borrowing from a 401(k) or 403(b)? Because you're borrowing the money from yourself, the interest you pay goes back into your own account. It is also an inexpensive and convenient way to come up with a down payment. The downside? If you leave your company without repaying the loan, the amount of the unpaid balance becomes a distribution and not a loan. That means that you will owe income tax plus a 10% penalty if you're under the age of 59-1/2. You can also withdraw money from your 401(k) or 403(b). This route is only recommended if your company doesn't permit loans and you have no other sources you can tap. The IRS permits hardship withdrawals to buy a home, but you'll owe tax on the amount you take out - plus the 10% penalty.
- Pull money out of an IRA or Keogh - Taking money out of your IRA or Keogh account should probably be the last resort. Like a 401(k) or 403(b), if you take money out of an IRA or Keogh before age 59-1/2, you will owe regular income taxes plus a 10% tax penalty. (For an early withdrawal on a non-deductible IRA, only the earnings are subject to taxes and penalties.) You can avoid the penalty (but not the taxes) if you've become permanently disabled and have a doctor's letter stating your condition will last at least 12 months. Another option is to take the money out and pay it back within 60 days - you won't incur penalties or taxes. In addition, the IRS allows you to remove funds at any age penalty-free if the withdrawal is part of a series of "substantially equal distributions" for at least 5 years or until you are 59-1/2, whichever is longer.
What is the APR, and how is it calculated?
Annual Percentage Rate (APR)
The APR is not the note rate. The Annual Percentage Rate (APR) reflects, as a percentage, the total cost of the loan - the interest charged is only one of those costs. Some of the other costs included in the APR are:
- Private Mortgage Insurance
- FHA mortgage insurance premium (when applicable)
- Prepaid finance charges (loan discounts, origination fees, prepaid interest and other credit costs.)
The APR is calculated by spreading those charges over the life of the loan. The result is that the APR rate is higher that just the interest rate shown on your Mortgage Note or Deed of Trust . If the interest were the only finance charge, then the interest rate and the annual percentage rate would be the same.
Prepaid Finance Charges
Prepaid finance charges are a class of costs charged in connection with the loan which must be paid upon the close of the loan. These charges are defined by the Federal Reserve Board in the Regulation Z. Those charges must be paid by the borrower. Some examples of non-inclusive prepaid finance charges are:
- Loan origination fee
- Discount fee (points)
- Private mortgage insurance or FHA mortgage insurance
- Tax service fees
Some loan charges are specifically excluded from the prepaid finance charge list - appraisal fees and credit report fees are two examples of costs that are not prepaid finance charges.
The finance charge is the interest, prepaid finance charges and certain insurance premiums (if applicable) which the borrower will be expected to pay over the life of the loan.
The amount financed is the loan amount that has been applied for, minus the prepaid finance charges. Prepaid finance charges can be found on the Good Faith Estimate and the Settlement Statement (HUD-1 or HUD-1A). The Annual Percentage Rate is based on the amount financed.
For example: The borrower's note is $100,000 and the prepaid finance charges total $5,000 - the amount financed is the difference of the two - $95,000.
Total of Payments
The total of payments is the total of all payments made toward the principal, interest and mortgage insurance (if applicable) over the life of the loan.
Why do interest rates change daily?
Despite what some people believe, mortgage-backed securities (MBS's) are the bonds that directly dictate fixed rate mortage interest rate pricing. The supply and demand for MBS's is the final determiner of how fixed rate pricing is set. Just like stocks, MBS's trade throughout the day. Large volumes of buying or selling can cause extreme fluctuations in the rate and point structure of loans available to borrowers.
Major market participants, just like individual investors, are constantly searching investment opportunites that will provide the greatest return with the least amount of acceptable risk. Investment products inherently all possess some sort of risk. For example, one risk associated with mortgage-backed securities, the bonds that directly dictate fixed rate mortgage pricing, is a fear of pre-payment. A homeowner obtains a loan for a certain duration of time at a certain interest rate. As interest rates fall, homeowners tend to refinance their homes, which leads to the early payoff of the first loan and the origination of a new loan at a lower interest rate. Investors are cognizant of this scenario and factor this risk into their demand for mortgage-backed securities. If the demand for MBS's is strong, the prices of MBS's increase leading to lower mortgage interest rates. However, if the demand for MBS's weakens, mortgage interest rates rise. Continued gains in the US stock market add to the competition for investors' funds. In addition, Treasury securities also provide competition and thus volatility. All of these factors contribute to the daily fluctuation of the mortgage interest rates.
How can I improve my credit score?
It's virtually impossible to change your score in the time between when most people decide to buy a home or refinance their mortgage and when they apply. The short answer is that you really can't improve your credit score "on the spot". However, there are strategies you can live with to make sure when you apply for a loan your score is as high as possible.
Make sure that the information each of the three credit reporting bureaus has on you is consistent and up to date. Order a copy of your credit report once a year and dispute any inaccuracies. You can obtain a free credit report by clicking here. You will be directed to the website the government created (AnnualCreditReport.com) to enable consumers to receive their credit report free of charge on a yearly basis from all three of the national credit repositories.
Theoretically, if a series of credit reports is requested on your behalf during a limited amount of time, your score goes down until time passes without any inquiries. Changes in the law have now made "consumer-originating" credit report requests not count so much. Also, a series of requests in relation to getting a mortgage or car loan is not treated the same as a number of credit card requests in a limited time. This is because the credit bureaus and lenders realize that people request their own credit reports to keep up with what's on them, and smart consumers shop around for the best mortgage and car loans. Unsolicited credit card offers in the mail don't count against your credit report, so there's no need to worry about how they affect credit scoring.
The two main components of your credit score are your payment history and the amounts you owe. Bankruptcy filings and foreclosures, which can stay on your credit report for as long as ten years, can significantly lower your score. It's never a good idea to take on more credit than you can handle.
Late payments work against you. It is extremely important to pay bills on time - even if it's only the monthly payment.
Don't "max out" your credit lines. Since the size of the balance on your open accounts is a factor, lower balances are better.
It is said that by carefully managing your credit, it is possible to add as much as 50 points per year to your score.
How can I determine my housing needs before I begin to search?
Your home should fit the way you live, with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities - things like location and size. Should the house be close to certain schools, your job, to public transportation? How large should the house be? What type of property do you prefer - a lot in a subdivision or acreage in the country? What kinds of amenities are you looking for? Establish a set of minimum requirements and a "wish list". Minimum requirements are things that a house must have for you to consider it, while a "wish list" covers things that you'd like to have but aren't essential.
To make this task a little easier for you, we have provided a Home Shopping Checkist for your use.
What is Loan to Value (LTV)? How does it determine the size of my loan?
The loan to value ratio is the amount of money you borrow compared to the price or appraised value of the home you are purchasing or refinancing. Each loan has a specific LTV limit. For example: with a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (which is 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 homebuyers are required to pay out of their own funds. To protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.
Are there special mortgages for first-time homebuyers?
Yes. AmeriFirst offers several affordable mortgage options which can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Many times, our Mortgage Consultants are now able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no credit or a poor credit history, have quite a bit of long-term debt or have experienced income irregularities.
How large of a down payment do I need?
AmeriFirst has mortgage options available that do not require a down payment. However, the larger the down payment, the less you have to borrow and the more equity you'll have. Mortgages with less than 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, remember that you'll also need money for closing costs, moving expenses and possibly repairs and decorating.
What factors affect mortgage payments?
There are many factors that affect the amount of your mortgage payment. The amount of your down payment, the amount of your mortgage loan, the interest rate and the length of the repayment term and payment schedule will affect the size of your mortgage payment. Also, many loan programs require an escrow account for your property taxes and/or homeowners insurance. The yearly amount for the taxes and insurance will also be divided and added to your monthly payment.
How are pre-qualifying and pre-approval different?
Pre-qualification is an informal way to see how much you may be able to borrow. You can be pre-qualified over the phone with no paperwork by telling the Mortgage Consultant your income, your long-term debts and how large a down payment you can afford. Without any obligation, this will help you determine an approximate amount you may have available to spend on a house.
Pre-approval is AmeriFirst's actual commitment to lend to you. Pre-approval involves assembling your financial and credit records 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.