Mortgage Loan FAQ

Shopping for a Loan: How to compare mortgages and rates

1. How can I determine what mortgage amount I will qualify for?

Based on your income, debt, and down payment, your lender can usually help you determine the maximum mortgage amount for which you could qualify within minutes. Many lenders provide phone support with a mortgage professional or mortgage calculators on their websites. This process is often called “pre-qualification analysis.”

2. How do I know which mortgage product will fit my needs?

Everyone’s situation and goals are different, so it is important to discuss your specific circumstances and goals with a mortgage professional that can help match your needs with a desirable mortgage.

3. Do most mortgage lenders provide construction loans?

Many mortgage lenders have construction-to-permanent financing loan programs, but programs vary by lender. Typically, a construction loan is an interim loan secured by the property on which a dwelling is being constructed. The funds are usually disbursed throughout the construction period and replaced with permanent financing once the construction is completed. You may also choose to utilize separate lenders for the construction financing and the permanent financing.

4. What is the difference between a mortgage broker and a lender?

A mortgage broker informs customers of the loans available from different wholesalers, takes your application, and usually processes the loan. This involves putting together the complete file of information about your transaction including the credit report, appraisal, verification of your employment and assets, and so on. When the file is complete, but sometimes sooner, the lender “underwrites” the loan, which means deciding whether or not you are an acceptable risk.

5. What is a full documented loan?

When income and assets are disclosed and verified, and income is used in determining the applicant’s ability to repay the mortgage it is a fully documented loan. Formal verification requires the borrower’s employer to verify employment and the borrower’s bank to verify deposits. Alternative documentation, designed to save time, accepts copies of the borrower’s original bank statements, W-2s and paycheck stubs.

6. What are some other types of loans?

* Stated income/verified assets (income is disclosed and source is verified, amount not verified. Assets are verified and must meet adequacy standard, such as, for example, 6 months of stated income and 2 months of expected monthly housing expense).

* Stated income/stated assets (both income and assets are disclosed but not verified, the source is verified)

* No ratio (income is disclosed and verified by not used to qualify. Assets are disclosed and verified)

* No income (income is not disclosed, but assets are disclosed and verified, and must meet adequacy standard)

*Stated assets or No asset verification (assets disclosed by not verified, income is disclosed, verified and used to qualify)

* No asset (assets not disclosed, but income is disclosed, verified and used to qualify)

* No income/no assets (neither are disclosed)

7. What is a conforming loan?

A loan eligible for purchase by the two major federal agencies that buy mortgages: Fannie Mae and Freddie Mac.

8. What is a jumbo mortgage?

A mortgage larger than the maximum eligible for conforming purchase by the two federal agencies, Fannie Mae and Freddie Mac.

9. How are rates determined?

Rates are determined by the stock market and other financial indicators. These rates can change daily or more, based on different economic indicators in the financial markets. Contact your lender for current interest rates.

10. How can I compare rates and fees?

When shopping for a loan, look at points, fees and the Annual Percentage Rate (APR). The APR includes the fees that are charged on your loan. Although one lender may have a slightly lower rate, they may charge more fees, and hence have the same APR as a lender with the slightly higher rate.

11. What is the difference between the APR and interest rate?

The APR (annual percentage rate) reflects the cost of your mortgage loan as a yearly rate. It also incorporates the cost to obtain the loan, such as discount fees and loan origination fee. The interest rate is the actual note rate.

12. Why is the Annual Percentage Rate (APR) on the Truth-in-Lending disclosure higher than the rate shown on my mortgage note?

The rate reflected on the APR shows the cost of the credit as a yearly rate. This rate is generally higher than the rate stated on your mortgage note because, in addition to the interest rate, APR includes other costs such as origination fee, loan discount points, pre-paid interest, and mortgage insurance. The APR allows you to compare, in addition to the interest rate, the total cost of financing your loan, among various lenders.

13. What is a rate lock?

A rate lock is a contractual agreement between the lender and buyer. There are four components to a rate lock: loan program, interest rate, points, and the length of the lock.

14. What is the difference between ‘locking’ and ‘floating’?

A lock gives you a specified period of time—usually 15-45 days—of protection from financial market fluctuations in interest rates by setting the range of pricing available to you. Your final rate, which may not be determined until closing, will reflect the pricing that was available at the time you locked for loans with your specific transaction characteristics and your credit profile.

While locking does not guarantee that a specific rate will apply, it does ensure that your loan pricing will be unaffected during the lock-in period by changes in financial market conditions. If you choose to “float” or defer “locking” your rate will fluctuate with the market and will be subject to both upward and downward movements in the market. The benefit to floating is if interest rates were to decrease, you would have the option of locking in at a lower level of rates.

15. When can I lock and how much does it cost?

Most lenders will allow you to lock once you have found a property and as late as up to five business days before closing. Some lenders may allow you to lock prior to finding a property. Rate locks and fees vary by lender.

Mortgage Process

1. What is the difference between pre-approval and pre-qualification

The pre-approval process is much more in depth than pre-qualification. For pre-qualification, you are asked minimal questions such as whether a customer has sufficient cash and income to meet the qualification requirements set by the lender. The customer is then provided with a prequalification letter. It is subject to verification of the information provided by the applicant. A prequalification is short of preapproval because it does not take the credit history of the borrower into consideration. Pre-approval includes all the steps of a full approval, except for the appraisal and title search. Pre-approval gives you stronger negotiating power when making an offer.

2. What is a pre-approval application?

A mortgage loan pre-approval typically results in a written loan decision following a complete mortgage application. You can typically apply for a pre-approved mortgage prior to signing a purchase agreement for a home. A pre-approval can also add to your negotiating strength when you are ready to make an offer on a home.

3. Is there an application fee?

Application fees vary. This fee is generally used to cover the cost of the appraisal and credit report and other items required to process the loan.

4. Do I need to fill out an application?

Yes, but you may be able to complete the application verbally right over the phone with a loan consultant. A copy of your application will be provided at the closing, which you will need to review and sign at that time.

5. What documents are typically required when I apply?

Documentation varies by lender and loan. Typically requested: W2s, paystubs, bank statements, and the purchase contract on the home you are buying.

6. How long does it take to get a loan approval?

Depending on your credit history, down payment, and the loan program, some lenders may be able to approve your mortgage in as little as 24 hours, although the time varies greatly from lender to lender. 7-10 business days are typical.

7. What is a good faith estimate?

A good faith estimate is a list of settlement charges that the lender is required to provide the borrower within three business days of receiving the loan application. How long will it take to close on my loan if I was already pre-approved? If you were already “pre-approved”, some lenders can close within 3 weeks of the contract signing. However 45-60 days from application to closing is typical. Lenders and loan details may vary the timeframes.

8. How fast can I close on my home loan?

Many lenders can facilitate closing 2-3 weeks after the purchase contract is finalized. If you need more time, you can take as long as you need, while still closing prior to any rate lock expiration dates. Many lenders require 30-60 days from the purchase contract to closing.

9. Is a home inspection required by lenders?

No, it is typically requested by the buyer as a condition to the purchase of the home. Many buyers will make the sale contingent on the inspection. An inspection is different than an appraisal, which is required by lenders to support the value of the mortgage.

10. What is an escrow account?

Typically this account is established at the time you close your mortgage loan. It is held by the lender for the future payments of recurring items relating to the mortgaged property, such as real estate taxes and insurance premiums, as they become due. Lenders usually require you to pay an initial amount for each of those items to start the reserve account at the time of closing.

11. Are there limitations on how much lenders can collect from a borrower for the borrower’s escrow account?

Lenders are required to follow the standards set forth in the Real Estate Settlement Procedures Act (RESPA) and applicable state law. RESPA and some states set limits on the amount which can be collected by the lender to pay for escrow items, such as property taxes and insurance, and place a cap on the amount of the reserve. Reserves are funds that a servicer may require a borrower to pay into an escrow account to cover unanticipated disbursements which will need to be made before the borrower’s payment is available in the escrow account. There are limits on the additional amounts that can be collected as reserves.

Refinance

1. If I refinance my loan with my existing lender, will I have to pay the closing costs again?

Generally, yes, the cost of the loan is a cost associated with processing a loan application, possibly including third parties (appraisals, title and closing providers).

2. When is it smart to refinance?

People typically refinance to save money, whether to lower interest rates or by reducing the term of the loan. Refinancing is also a way to convert an adjustable loan to a fixed loan or to consolidate debt. If you are looking to save money, compute the savings you will get against the cost of the refinance process and consult a mortgage professional.

Fees/Insurance

1. Does the lender require title insurance for purchase transactions?

Yes, a Mortgagee’s Title Insurance Policy is required on purchase transactions.

2. What homeowner’s insurance requirements will I need to meet at closing?

Most lenders require a one-year paid receipt for homeowner’s insurance policy for at least the amount of the mortgage at closing.

3. Is there an application fee?

Application fees vary. This fee is generally used to cover the cost of the appraisal and credit report and other items required to process the loan.

4. What is PMI and why is it required?

PMI (Private mortgage insurance) is written by a private company that protects the lender from losses in the event the borrower defaults on the mortgage. Private mortgage insurance limits a lender’s exposure to financial loss resulting from loan default. If you make a down payment of less than 20%, even with good credit, lenders will generally require private mortgage insurance.

5. What is the minimum down payment required in order to eliminate PMI?

Typically, on a primary residence, the minimum down payment to avoid PMI is 20%. Your lender may have alternative loan options to help avoid PMI, if you wish.

6. How long am I required to have PMI on my loan?

The Homeowner’s Protection Act of 1998 allows borrowers whose loans originated after July 29, 1999 to request cancellation of PNI at 80% loan to value (LTV) based on amortization or actual payments if the borrower has a good payment history, if the borrower provides evidence the property value has not decreased, and certifies there are no subordinate liens on the property. Lenders are required to terminate borrower-paid PMI at 78% LTV based on the amortization schedule if the loan is current. If none of the above is done, PMI will terminate automatically at the midpoint of the loan term. For loans originated prior to July 29, 1999, PMI guidelines will vary from lender to lender and can change at any time. Some investors will not allow the cancellation of PMI. Typically, PMI is required on your loan for a minimum of 24 consecutive payments absent any law to the contrary. After that time, if you have 20% or more equity in your property and meet certain other conditions, you may request to have it removed. Typically there is no guarantee that your PMI will be removed, and most loan investors will require a new appraisal at your expense prior to removing PMI.

7. How much does mortgage insurance (PMI) cost?

The cost of PMI includes 1) a payment at the time of closing and 2) an ongoing payment made each month with your principal and interest payment.

8. Are there alternatives to mortgage insurance?

Yes. Discuss options with your loan professional.

9. What is an origination fee?

An origination fee is the amount charged for services performed by the company handling the application and processing of your loan.

10. What are points (or discount points)?

A discount point is paid to the lender to permanently buy down or lower an interest rate. It is usually a percentage of the loan amount.

11. What are lender fees?

Lender fees are the cost of producing a loan, also known as processing fees or underwriting fees.

12. What is prepaid interest?

This is the interim interest that accrues on the mortgage loan from the date of the loan closing to the beginning of the period covered by the first monthly payment. For example, if your closing date is scheduled for June 15, the first mortgage payment is due August 1. The lender will calculate a per-day interest amount that is collected at the time of closing. This amount covers the interest accrued from June 15 to July 1. Some lenders prohibit the collection of prepaid interest.

13. Can the lender include my closing costs in the loan amount?

On a purchase transaction, you cannot typically finance your closing costs, although some lenders may have special programs. If you are refinancing, you may be able to refinance some, or all, of the closing costs.

14. What is title insurance?

Title insurance provides the lender and the buyer (if you purchase owner’s coverage) with coverage for losses resulting from specific title defects listed in the policy. In cases where land and property have changed hands over time, there is always the possibility an error has occurred. If an error has occurred, it may be that someone else has an interest in the property, that improvements encroach on property lines or that other similar problems may exist. In these scenarios, if you do not have title insurance you could lose your investment in your home. Lenders require “lender’s coverage” to protect their investment and it only protects the lender. Owner’s coverage is optional and provides separate coverage for the borrower.

Closing

1. Can I close on a home without having to be at the closing table?

“Mail away” closings are typically permitted, where the documents are delivered by overnight service to ensure a timely closing. In some cases a Power of Attorney can be used to have some sign on your behalf. Each state has its own specific requirements, so check with your closing agent for state-specific requirements.

2. How much money is required at closing?

Your down payment, closing costs, and prepaid items for your initial taxes and insurance escrow accounts are all due at closing. Your lender is required to provide you with a good faith estimate of settlement costs at the time of application. Typically you will receive a finalized sum of money required at closing within 24 hours of the transaction.

3. What homeowner’s insurance requirements will I need to meet at closing?

Most lenders require a one-year paid receipt for homeowner’s insurance policy for at least the amount of the mortgage at closing.

Special Circumstances

1. Can I close on a home without having to be at the closing table? “Mail away” closings are typically permitted, where the documents are delivered by overnight service to ensure a timely closing. In some cases a Power of Attorney can be used to have some sign on your behalf. Each state has its own specific requirements, so check with your closing agent for state-specific requirements.

Final Loan Arrangements & Payments

1. Can I have my monthly mortgage payment deducted automatically from my bank account?

Typically after closing you will have the option to enroll in an automatic payment program. You may be asked to provide an authorization form and voided check or account slip to set up the draft.

2. Will a lender allow me to pay my mortgage payment with a credit card?

Typically, no. If it is automatic payments you are looking for, there are usually other available options.

3. Is there a place I can view my mortgage account online?

Most lenders provide the ability to view your account online, so ask beforehand what resources your lender offers.