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What is an escrow account?
An escrow account is an account set up by a lender to collect money each month from
the borrower to go toward taxes, homeowners insurance etc. Those items are then paid
by the lender, or 163mortgage servicer, when they are due.
Sometimes the lender will collect money from the borrower at closing, so there will be
enough in the account when the item is due. An example of this might be a first time
home buyer whose taxes are due in three months.
Borrowers sometimes are given the option, by the lender, to do what it called waiving
escrows, which means that the borrower agrees to pay those bills themselves when they are
due.
Do I have to have an escrow account?
This will depend on the lender. It is usually based on how much
89equity you have in the house, and whether they allow it.
Often though, lenders will charge a higher rate when borrowers choose to waive
escrows (pay their own taxes). This is because if the borrower defaults, the lender
will have collected money for taxes prior to the default, whereas, if the borrower
defaults without an escrow account, the lender will be paying the back taxes.
What are some of the benefits of home ownership?
There are many benefits to home ownership. Some of them include:
- Tax benefits. Mortgage interest and property taxes are deductible for most
people. (Check with your tax professional)
- Appreciation benefits. Historically, Real Estate values have increased over time,
despite economic turndowns, and many homes will likely be worth more in ten years than
they are today.
- Equity benefits. Having equity in a home gives reserves to draw from should the
need arise.
- A place to call your own.
What is a FICO, or Credit Score, and how is it determined?
Your credit score consists of several components, each which contributes to your score.
Credit is pulled from the three main credit bureaus (Trans Union, Experian, and Equifax)
and lenders use the middle of the three scores.
The major factors are:
1) Payment history, which is about 35% of the total score. This indicates how well a
borrower is able to pay on time. Recent lates of any kind, including utility bills, and
mortgage lates weigh the most heavily.
2) Level of indebtedness. This is the balance of a credit line versus the total limit, and
is about 10% of the score. Ideally the balance will be under 40% of the limit.
3) Length of credit history. Demonstration of being able to manage credit long-term. This
makes up about 10% of a credit score.
How much do I have to put down to buy an investment property?
This varies from lender to lender, but many are looking to have at least 25% or more of
a down payment. There are many of reasons for this. Some of these reasons are:
- Lenders want to know that a borrower has a financial interest in a property.
Someone putting a larger some of money down on a property will most likely be
motivated to preserve their investment, and less likely to walk away.
- Renters are unpredictable. Should renters either pay late, or stop paying all
together, the owner will be motivated to either get them to pay, or find other tenants to
replace them, making the payment out of their own funds in the meantime.
What is Mortgage Insurance?
Mortgage insurance is basically an insurance policy for lenders. Lenders require
Mortgage Insurance on loans that are more than 80% of the value of the property.
Borrowers pay this insurance in the form of a monthly premium.
Lenders require these premiums to minimize their risk should the borrower default.
With fluctuating property values, plus the expense of managing and reselling a
defaulted-on property, lenders want to be able to recoup at least the original loan
amount.
Borrowers putting down over 20% are less of a risk in the eyes of most lenders, and
therefore an exempt from mortgage insurance.
Do I need homeowners insurance on my property?
Absolutely you need homeowners insurance. Should the property be uninsured, and
then suffers catastrophic damage, the lender would likely have no recourse with the
borrower in getting the property repaired.
There are in fact documents that the borrower signs at closing (for both purchases and
refinances) that indicate this, and should the lender find that insurance has lapsed, or
been cancelled, they (the lender) has the right to provide insurance for the borrower,
then bill him or her.
What is the difference between a condominium and a town house?
In a townhouse, the owner of that townhouse owns the land under it as well. Each
parcel of land has its own 203PIN. In a condominium,
the Condo Association owns the entire parcel of land on which the condominium development
sits.
The 218Homeowners Association dues are usually higher in
a condominium than in a townhouse or townhome as well, because things like
9homeowners insurance, taxes and maintenance are under a
blanket policy and are collected by the association.
In a condo for example, one roof may sit above eight units. When that roof needs
to be replaced, the money for it would come out of a general fund, versus collecting money
from eight individual homeowners.
A 201PUD, or Planned Unit Development can be made up of
townhouses, condo-like units, or single family homes, each under its own PIN. PUDs
have their own homeowners associations, or HOAs.
Who are Fannie Mae and Freddie Mac, and what happened to them?
Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan
Mortgage Corporation) are what are called Government Sponsored Entities (GSEs). They
are publicly traded companies which are also chartered by the Federal Government.
Their purposes is to raise funds from investors, then take these funds to mortgage
lenders, who in turn help homeowners buy homes. Fannie and Freddie, via the
investors, also write guidelines as to what mortgages they are interested in purchasing
from lenders.
After the loans close, Fannie and Freddie buy the loans back from the lenders.
They then bundle perhaps hundreds or thousands of them together into what are
called Mortgage Backed Securities, also known as an MBSs. These MBSs then go back
to the original investors. These investors then buy and sell them on Wall Street and
elsewhere around the world. These securities are traded on what is called the
secondary mortgage market.
So what happened?
Over time, the investors realized that by loosening the guidelines of the loans they
would agree to purchase, they could make more money by being able to trade more loans, and
realize a higher return on the riskier ones. The guidelines were relaxed, and more
borrowers were now able to qualify.
Unqualified borrowers began getting, then defaulting on mortgages. There are many
reasons for this. Some of these reasons include decreasing property values, and a
weaker job market.
As the mortgages were defaulted on, the value of the securities that they made up
decreased as well. Investors around the world, including large Wall Street firms now
had securities that were imploding, and were incurring huge losses. The media
coverage of this has been extensive.
In late 2008, the Federal Government took over Fannie Mae and Freddie Mac. These
two companies are so tied into the American economy that they needed to stay afloat.
The model under which they do business will change, and eventually be turned back
over to corporate management.
How does this affect me?
This action of the Federal Government, among others related to the mortgage crisis, is
designed to stabilize the market. With both the investors, and Fannie and Freddie
now tightening their guidelines, hence staying away from riskier mortgages, the rate of
default should decrease over time. This may limit who will be able to get a
mortgage, and for how much, but the good news is that it should help stabilize both the
mortgage and credit markets.
What is a debt to income ratio?
A debt to income ratio is the ratio of a borrowers gross income (before taxes) compared
to the debt that they are carrying. This can be broken down further into front
end and back end ratios. A front end ratio is your gross income
compared to your house payment, including taxes. The back end ratio is your gross
income compared to all of your monthly obligations.
A simple example will help clarify this.
Lets say a borrower makes $3000 per month. Lets also say that their house payment
is $1200 including taxes. In addition to this, they have $600 per month between
their car payment and store credit cards.
Their front end ratio would be: $1200/$3000 or 40%
Their back end ration would be $1800/$3000 or 60%
These numbers are important to lenders in that they tell how stretched a borrower is
going to be if and when that borrower acquires a loan from them.
Do I need a real estate attorney when I buy a house?
Attorneys are optional in most states, with the exception of Texas, but are highly
advisable to have. They are invaluable in explaining and catching things that most
borrowers may miss completely.
Most Real Estate contracts have a provision that allows for attorney review.
Catching something in the beginning part of the buying process can save time and
money down the road.
As far as a real estate closings go, title companies, in the course of a closing
explain each document that the borrower signs to the borrower, but are neither under any
obligation to make sure that the borrower understands the documents, nor do they
claim to represent the borrower. Have an attorney their, as they will be
representing only you.
How much do real estate attorneys charge?
A typical fee, depending on what needs to be done would fall in the $300 to $600 range.
I am currently or a recently graduated College Student. Can I still buy a
house?
The FHA Kiddie Condo program is where first time home buyers, including college
students or recent grads can use the income and assets of their parent, or some other
blood relative, to qualify for the loan. Both the First Time Home buyer and the
relative are on the loan, and own the property. One of them must live in it.
This is a great way to start establishing credit, especially for a student, because
when they graduate, they will have a mortgage history on their credit report. Other
benefits include getting a lower interest rate than on an investment property, which this
would normally be considered. FHA also has a lower down payment requirement than
other types of loan programs, so it can be easier to get into.
What is a Rate Buy Down?
A Buydown is a fee that a borower pays to a lender to permanently lower their interest
rate. The cost of this will be based on the amount of the loan, the original rate,
and the amout that the borrower wants to buy down the rate.
A buydown fee is different from 177Points, or an
177Origination Fee that the lender may charge the borrwer.
What is an Interest Only loan?
An Interest Only loan is one where only interest is paid for a set period of time,
normally 10 years. After this initial period, the entire principal is paid off, or
168&Group_ID=LTamortized, over the reminder of the term of
the loan.
What is a Mortgage Broker?
A Mortgage Broker is an intermediary that connects mortgage lenders looking for
customers with customers looking for residential home financing. Mortgage Brokers,
as opposed to banks, work with many different lenders, and are able to compare these
lenders on similar products, to be able to find the end customer the very best deal.
Lenders pay brokers what is called a 178Yield Spread Premium.
This premium is a fee to the broker for their effort in finding the borrower, taking the
application, and preparing the loan file for delivery to the lender.
Banks will fund their own loans, where in the case of a broker, they will have the
lender wire the funds to the closing, on behalf of the lender. Some brokers have
what are called warehouse lines, from which they fund the loans themselves, and are later
reimbursed by the lender.
What does it mean to be in Foreclosure?
Being in foreclosure means that a borower has missed a set number of payments, usually
three, and the lender has started legal action, to take back the property. The
process starts with what is called a Notice of Lis Pendens.
Borrowes that have missed some mortgage payments, but fewer that what it takes to be
considered foreclosure, are in what is called 224Pre-Foreclosure.
What is a Note?
The Note is the document which shows how much is being borrowed on a property, who is
borrowing it, and the terms of repayment. The note is secured by the mortgage. The
mortgage is a document showing who owns the property, but itself has no obligation of
repayment.
This means that if the note is defaulted on, the holder of the note, the lender, can
take back ownership of the property via the mortgage. People on the mortgage are
also normally on 38title.
What is the $7,500 tax credit I am hearing about?
This economic stimulus is part of the Housing and Economic Recovery Act of 2008.
The program runs on homes closing between April 9, 2008 and April 1, 2009.
First time home buyers, meaning those that have not owned a home in the last three
years can take a take credit of the lower of:
- 10% of the homes value
- $7,500 dollars
If the borrowers tax bill is less than $7,500, the government will refund the
difference between the lower amount and $7,500
Read the fine print.
This is in effect though, an interest free loan from the government that borrowers at
some point will be paying back. Borrowers must start repaying the loan within two
years at a maximum of $500 per year, for 15 years. If the house is sold within the
15 years, the government gets the remainder of the loan balance from the profit of the
sale. If the house is sold at a loss, the loan is forgiven.
What is a Mortgage Backed Security (MBS)?
A Motgage Backed Security, or MBS, as it is called in the financial world, is a
security instrument made up of hundreds, or sometimes thousands of mortgages that have
been bundled together. These securities are traded on what is called the sendary
mortgage market.
What is an Option, or Hybrid ARM?
An Option ARM, also known as a Hybrid ARM is an 42Adjustable
Rate Mortgage which has what is called Negative Amortization, and has the potential to
increase the loan principal over time. These products will benefit some borrowers,
but should only be used by people that completely understand how they work.
How they work is this: These loans have two rates, they are the interest
rate and the payment rate. The payment rate is the rate
reflected in your payment, for example, 4%. The interest rate is the rate
that the lender is charging you to borrow the money, lets say 8%. The
difference between the two rates goes back onto the principal. This is what negative
amortization is. This difference can add up real fast.
What does a Title Company do?
A Title Company coordinates the transfer of real estate from one party to another.
Specific tasks that they perform include:
Perform a Title Search, called an abstract, to determine what liens are on the property
Prepare a policy of 31Title Insurance to protect against
unforeseen liens
Loan Document Review
Receive closing package and distribute funds from Lender
Review and notarize documents at closing with borrower
Prepare documents to be recorded at the county
What is Title Insurance?
Part of what a title company does is to search county records, specifically
properties for which they are providing title services. In searching these records,
they look for what are called defects. Defects are items that would inhibit the new
owner from having a clear title on that property, such as liens that the seller is unaware
of.
Title insurance is a policy saying that if there are defects that arise after
the search is comeplete, and after the closing, the insurer will investigate, and
potentially absorb those defects.
Can I write off the interest on my mortgage and my property taxes?
In most cases yes, along with your mortgage insurance premium if you have one, but be
sure to check with your tax professional. This is one of the
3benefits of home ownership.
Do I need a Social Security number (SSN) to get a mortgage?
There still lenders that exist through which borrowers can get a mortgage without a
Social Security number. This group includes 174foreign
borrowers purchasing property in this country, and nonresident aliens that live here,
without Social Security numbers.
What is a Quitclaim deed?
A Quitclaim, or Quit Claim deed, is a legal document to assign or remove ownership on a
property. An example of this would be if a couple gets married, and they decide that
one of them will remain off of all of the loan documets, and have no ownership in the
property.
In some states, a spouse owns the property automatically by being married. These
are called 37homestead rights. To waive these rights, a
Quitclaim deed is used. A quitclaim deed is also used to put properties in and
pull them out of a 200land trust.
What does Homestead mean?
Homestead refers to the property that a borrower owns, and the dwelling that sits on
it. A Homestead is often shielded from being taken by creditors as the result of
being delinquent of debt.
In the case of mortgages, the borrower may be asked to sign a
119Waiver of Homestead, which gives the lender to take back the
property and dwelling in the case of default on the mortgage.
What is a Title?
Title is a legal document prepared by a 30Title Company
or an attorney that is used to show ownership and possession of a piece of property.
It has several sections. and shows:
- Who owns the property,
- How long they have owned it
- How, or in what manner, they own it through what is called a 39Title
Vesting
- What liens are held against the property
What is a Title Vesting?
Title Vesting shows how a property is owned. Vesting types include Joint Tenancy,
Tenancy in Common, Community Property, among others.
It is extremely important that the borrower(s) understand how the property is
held, as the way it is held will determine what will happen to the property in the event
that one or more of the borrowers passes on. Always consult with a real estate
14attorney to find the best vesting for your property if you
are unsure, even in the case of a refinance.
What is a Home Inspection?
A Home Inspection is an inspection of a property by a licensed professional that will
check structural and mechanical aspects of the property, to determine if any work needs to
be done, from structural or safety aspects. These aspects include the roof,
electrical and plumbing systems, and things like mold and Radon, if they are specifically
licensed to.
Home inspections are not required, but are highly advisable, even on new construction.
Many purchase contracts allow time to get one done, so issues, if they are found,
can be addressed before moving forward with the purchase agreement.
A home inspection is different from an 40appraisal, in
that an appraisal goes into far less detail on specifics of the property, but give a
market value to the property as it relates to comparable properties.
What if the appraised value of a house I am about to buy is less than I am
paying for it?
Lenders will use the lower of either the contract price, or the appraised value when
making a lending decision. That being said, one of three things can happen:
1. The seller can lower the price and write up a new contract. A
standard real estate contract should require that the property have an appraised value
equal to or greater than the contract price. This is why it is a good idea to have a
real estate 14attorney review anything before you sign it.
2. The buyer can pay the difference out of their pocket. This way, the
lender is only lending based on the lower value.
3. If the contract states that the property must appraise out, the buyer can walk
away from the transaction.
What is an ARM?
An ARM is an Adjustable Rate Mortgage. This means that the loan has a fixed rate for a
set number of years, usually from one to seven, then after that the rate changes. A
5/1 ARM for example, will have a fixed rate for the first five years, then adjust once per
year after that.
ARMs can adjust more or less frequently than one year though. There are two
components that make up the rate on an ARM. They are the Index and the margin.
The index is based on some financial index, such as the LIBOR, or Treasury
Index. This number will fluctuate over time. The margin will
remain a fixed number for throughout the life of the loan. The margin and
the index are added together to arrive at the rate the borrower will pay.
Other numbers associated with ARMs are the adjustment caps, floors, and ceilings.
The adjustment cap is how much the rate can move in any one adjustment period.
The ceilings and floors indicate how high and low the rate can go throughout the
life of the loan.
ARM products are often attractive to borrowers, in that their rates are often lower
than those of fixed rate loans. The caveat though is that the rate will
inevitably change, often rising. Another type of ARM to be aware of is the
29Hybrid, or Option ARM.
What is negative amortization?
Negative amortization, means interest charges that can potentially be rolled back onto
the principal, resulting in an increase in that principal. Loan types that have
negative amortization are often called 29Option, or Hybrid ARMS.
What does APR mean?
APR stands for Annual Percentage Rate, and in the context of a mortgage, it is a
measure of the cost of credit expressed as a yearly rate. It takes into account the
various fees that are inherent in the loan process, and is usually higher than the loan
rate a borrow is paying.
An example of this would be a $150,000 30-year fixed rate loan taken out at 6%.
If there were $1,5000 in fees, the APR would calculate out to 6.039%. This
inofmaion is required to be disclosed by lenders to borrowers.
This is so a borrower can shop different lenders and compare the APR. Even if the
rates are the same for different lenders, the APR will indicate a higher overall cost to
the borrower.
What is a prepayment penalty?
There are two types of prepayment penalties, hard and soft?
A Hard prepayment penalty states that if the mortgage is paid off, or in some
cases greatly paid down, in a set period of time, often three years, then the borrower
will pay some sort of penalty.
A Soft Prepayment penalty states that the property may be sold, hence paying
off the loan, without a penalty, but that if it is refinanced, then the borrower would get
a penalty.
Lenders, as in incentive to get borowers to keep the loan for an extended period of
time, offer lower rates in exchange for being able to apply a prepayment penalty.
What is a Balloon mortgage?
A balloon mortgage is a loan where the entire principal is due in some specific period
of time, such as 5, 7, or 10 years. Payments are made though, as if the loan were to
paid off, or 168amortized over 30 years. If the
homeowner has the mortgage at the time the balloon comes due, the homeowner can simply
refinance the loan, thereby paying off the balloon.
Why would someone want to take out a balloon loan? The answer is that the rate
might be lower than that of a 30 year fixed rate loan. Or, they might only expect to
be in the property for a few years, and want more stability in a rate than an
42ARM would offer. This way they get the stability of a
fixed rate loan, while paying a below 30 year fixed rate.
What is a Loan to Value ratio?
A Loan to Value (LTV) Ratio is the loan amount, or remaining loan amount on a property
versus the value of a property. If a property is worth $100,000 and the mortgage, or
mortgages on the property have balances totaling $80,000 then the LTV is 80%.
What is Earnest Money?
Earnest money is money given by a buyer of a home, to either a seller, or builder to
show interest in purchasing a property, to show interest. If an agreement on price
and terms is agreed upon, that money becomes part of the down payment, otherwise, it is
returned to the buyer.
What is a Contingency on a sales contract?
A contingency is a clause stating that something must happen before something else can
happen. An example of this, from a lending perspective may be that the buyer must
sell his or her previous house and use the proceeds on the new house by x date, or
they lose the earnest money they gave the seller.
What is FHA, and what can they do for first time home buyers?
FHA is a division of The Department of Housing and Urban Development, or HUD.
They offer loan programs that require less of a down payment than on a conventional
loan, and have more relaxed credit guidelines, making it easier for first timers to
qualify.
Borrowers, and to some extent experienced real estate agents, if you are working with
one, that have dealt with FHA may have the opinion that getting a loan through them is
long drawn-out process, with many hoops to jump through. Nothing could be further
from the truth. Many lenders are now FHA sanctioned, and much of the processing of a
loan is done electronically, making things happen quickly.
To see how an FHA borrower profile will compare to one of a conventional loan, please
click 228here.
Am I required to get a home inspection?
214Home inspections are not required, but are highly
advisable, even on new construction. Many purchase contracts allow time to get one
done, so issues, if they are found, can be addressed before moving forward with the
purchase agreement.
What is RESPA?
RESPA stands for the Real Estate Settlement Procedures Act. It is a set of rules
that govern mortgage lenders across the country, requiring them to provide borrowers with
certain disclosures at the time of application, which include ones that show fees.
The core set of disclosures are the same from state to state, although states may
have specific ones beyond that.
At closing, the title company, or attorney handling the closing will provide the
borrower with what is called a 27HUD, or settlement
statement. This document clearly shows all of the fees that that are incurred by the
borrower.
What is the Right of Recission?
This refers to rights a borower has in the course of a refinance transaction. The
first three business days after the closing are in what is called a Recission Period. This
is where the the borrower has the ability to cancel, or stop the loan from
62funding.
If the lender receives no notice that the borower wishes to cancel, the loan will find
on the fourth day.
What does a Funding mean?
Funding refers to the point int time when the money that the borrower is borrowing
reaches either the seller in the case of a purchase, or the new lender in the case of a
refinance.
What do the terms Wet Closing and Dry Closing mean?
A Wet closing is when the loan 62funds the day of the
closing. If there are issues at the closing table that will take longer than by the
end of the day to resolve, the closing is considered Dry. The person handling the
closing puts the documents into an escrow and can complete the closing without having to
re-assemble the original parties.
Can I change my mind, or cancel my loan once I take it out?
Purchase transactions are generally non-cancellable once the closing is complete.
Refinance transactions though, in some cases, have what is called a
47right of recission period. This is where the borower
has the right, by law, to cancel the transaction up to three business days after the
closing date. After the three days, the loan is funded, and would be unable to be
cancelled at that point.
The right of recission only applies to primary residences and second homes, meaning
investment properties are exempt from this.
Purchase transactions are generally non-cancellable once the closing is complete.
Refinance transactions though, in some cases, have what is called a right of
recission period. This is where the borower has the right, by law, to cancel the
transaction up to three business days after the closing date. After the three days, the
loan is funded, and would be unable to be cancelled at that point.
The right of recission only applies to primary residences and second homes, meaning
investment properties are exempt from this.
Should I get preapproved before I look for a house?
Yes. This would be a good idea for two reasons. They are:
- Youll know exactly what you can afford, so you can spend your time looking at the
right properties.
- Most realtors will want to know that buyers are able to get financing, and what they can
afford before they use their resources showing them homes.
A basic preapproval takes between 15 and 45 minutes, and consists of taking an
application and running a credit report. Based on the findings of the credit report,
and information obtained in the application, the lender can issue a prequalification
letter which states that the borrowers is prequalified based on the information taken on
the application.
The lender will give the borrower a list of documents that they require to further
process the application. Once the borrower information is verified, they will be
issued a full approval.
After they find a house, sign a contract, and an appraisal is done, providing
everything is cleared by the lender, the lender will issue what is called a
108Commitment Letter, letting the sellers of the property know
that they intend to lend money to the borrower for the purchase of that property.
Do I have to insure the contents of my house?
Contents of a financed property only need be insured if the borrower wants them to be.
Lenders only require 9homeowners insurance coverage
on the structure itself, so in the event of some catastrophe, it can be put back into a
habitable condition.
What is Renters Insurance?
Renters Insurance is for tenants in a rental property. The insurance provided by
the landlord covers the dwelling itself.
Do I need to attend, or be at my closing?
No. You can assign what is called Power of 14Attorney to
someone to act on your behalf.
What is Power of Attorney?
Power of Attorney is where a person involved in a mortgage transaction authorizes
another person, usually an attorney, to act on their behalf with regard to the transaction.
This occurs in a situation such as where a borrower, for whatever reason, would be
unable to attend a closing in person.
What is a HELOC?
HELOC stands for Home Equity Line of Credit. This is a line of credit taken out
against the equity of a property. If there is a first mortgage already on the
property, the HELOC would be considered a 742nd mortgage.
Typically the terms of a HELOC are that payments are made on the interest portion of
the balance only
What is a Home Equity Loan?
A Home Equity Loan is a mortgage taken out against the 89equity
of a property. This mortgage can be either a fixed or variable rate product, and has
payments of principal and interest due each month.
A Home equity loan is different from a Home Equity Line of Credit, or
72HELOC, in that HELOCs usually have interest only payments,
and those payments can vary from month to month, based on the balance of the line.
If there are other liens on the property when it is taken out, it would be considered a
74second mortgage.
What is a 2nd Mortgage?
A second Mortgage is simply a mortgage loan taken out on a property that stands second
in line to a first mortgage. This means that, if the borrower defaults on their
mortgages on the property, the holder of the first mortgage will be paid before the holder
of the second when the property is sold.
Second mortgages, as first mortgages can be either fixed or variable rate. Second
mortgages can be in the form of a Home Equity Loan, or Line of Credit, also known as a
72HELOC.
Rates on second mortgages, specifically those of the fixed rate kind, are higher than
those of the first. This is due to the added risk that the lender is taking,
standing behind, or subordinating themselves to the first lien.
Can a property be put into either a living or land trust at closing?
Some lenders do allow properties to be put into a 200trust.
Other lenders will want the borower to put into their own name, and may require the
property to have been in their name for a period of time prior to the closing.
What is a Rate Lock?
A Rate Lock is when a borrower has decided that they would like to accept the current
market rate as the rate for their loan. Prior to locking, the rate is considered
floating. Once the rate is locked, in the case of a mortgage broker, that broker
agrees to deliver to the lender a loan at the rate and amount at which the loan was
locked.
How much experience do I need as a landlord to be able to buy an investment
property?
No experience is required, but if a borrower is putting down less than 25% and has less
than two years experience, the lender will require that the borrower be able to document
enough income to be able to cover both the rent on their primary residence, and the one on
the investment property.
This is because the lender want to know that the borrower knows how to manage rental
properties, in areas such as finding tenants, and can prove they can make payments despite
periods of vacancy, if they occur.
How many Financed Properties can I own at one time?
As of August 2008, four per Fannie Mae and Freddie Mac. This includes primary
residences, second homes, and other investment properties. There are other channels
of financing, but borrowers looking to get a loan through conventional channels will have
this limit.
What does zoning mean?
Zoning refers to how a taxing body, such as a city or county expects a parcel of land
to be used. Typical zoning classifications include:
- Residential
- Multiple Family Residential
- Commercial
- Mixed Use
- Rural
- Agricultural
There are also sub categories which designate how many structures can be put on a
parcel. R-3 is a residential zoning code which allows three single family homes per
acre to be built. A parcel zoned Mixed Use can refer to a building with a business,
such as restaurant on one floor, and condos on another.
What is a lot loan?
A lot loan is a mortgage on an undeveoped piece of land. These propeties fall
into the categories of either improved, or unimproved. Improved means that it has
utilities, such as gas, water, and electric. Unimproved means that the land is
without these things.
Do I have to include alimony or child support on my loan application?
Alimony and Child Support are not required to be disclosed on a mortgage application.
What is Equity?
Equity is simply the difference between what a property is worth (what it could be sold
for) and the balances of the mortgages on it.
Example: If a borrower has a house they could see for $200,000, and they have a 1st
mortgage for $100,000 and a 742nd mortgage for $50,000 they
would then have $50,000 in equity.
What is an application fee? Can I be charged one? Is it refundable?
An Application Fee may be charged to potential borrowers, at application, and
if so, is often credited back at closing. This is something for the time and effort
of the broker, or lender, should the applicant be shopping several lenders at one time,
and decides to go with another, after the lender has put time and money into processing
their application.
There is no obligation for a borrower to remain with any one lender, and the fee is
usually non-refundable unless the borrow complete the process through to closing.
What are closing costs?
Closing costs are costs that are associated with the financing of a home. These
include:
- Loan application fees and credit report
- Title and insurance fees
- Property Appraisal
- 53Home Inspection
- Lender Fees
- 181Recording fees
- 14Attorney Fees
- 177Points and origination fees
- 1Escrow reserves, such as taxes and insurance
Often, lenders, specifically brokers, when they are able, to be competitive will waive
some or all of the above fees based on the amount of 178yield
spread that they are earning from the lender.
Can I get financing on a trailer, mobile, or modular home?
Yes, there are lenders that specifically work with these products, and communities
designed for them. There are different ways of owning these types of homes.
Some are titled as real estate, some are titled as vehicles, with VINs.
The way they are financed is also determined by whether the owner owns the property
underneath them. Many communities have 93leaseholds,
whereby they rent the land to the owner, who then finances the home on top of it.
What is a leasehold?
A leasehold is basically a land lease, where a borrower can own and build and own a
home on a piece of land, but the land itself is owned by another entity such as a resort,
or perhaps a retirement community.
When lenders lend on a property in a leasehold, they review the terms of it, mainly the
length of the leasehold, and what restricitions are placed on the borrower.
What is a 1031 Exchange?
This is an IRS tax code where one investment property is sold, and the proceeds go
directly into another investment property without the owner ever taking hold of them.
There are time limits on re-investing the funds and other stipulations. Check
with your tax professional for more details.
What is a no doc loan?
These are for the most part non-existent these days. A no-doc, or no
documentation loan is one that is purely 89equity and
4credit score driven. This means that the lender is
basing the loan on only the credit profile of the borrower, and the amount they are
borrowing compared to what the property is worth.
What is a Stated Income loan?
A Stated Income loan is one where a borrower states, but does not document his
or her income. Assets are documented with this type of loan though.
These loans are becoming more scarce, and are used mainly by
129self employed people.
Persons wanting to obtain this type of loan must be able to prove that they have been
self-employed for at least two years. The lender will request a letter called a
137CPA letter from whomever prepares the taxes of the potential
borrower, confirming the type of business, and other information, relating to that
business.
In cases where Stated Income loans are offered, borrowers have very high credit scores,
lots of verifiable assets, and lots of 89equity in their
homes.
What is a Compensating Factor?
A profile of a borrower is made up of many different components, such as credit,
employment, assets, and liabilities. Should a borower fall outside of the lender
guidelines, such as having a lower credit score, strengths in other areas, like having a
lot of 89equity in the property, or a lot of assets will
compensate for this.
What is Predatory Lending?
This is a highly illegal practice where lenders either charge borrowers excessively
high fees or rates, for the purpose making more money than they would otherwise.
What is a Subprime Loan?
A Subprime loan is one which is acquired using borrower profile prameters outside of
what is considered conventional. Conventional guidelines include those of
11Fannie Mae and Freddie Mac.
Subprime guidelines allowed, as there are very few of these programs left, very relaxed
terms, including a low, or no down payment, and challenged credit. Borrowers were
charged very high rates and fees.
What is a Tax Stamp?
A Tax Stamp is a levy mandated by the government on the transfer of ownership of real
estate. If a borrower is being charged one, it will be listed on both the Good Faith
Estimate that they receive around the time of application, and the
27HUD at closing.
Do I have to have a job to get a mortgage?
There are instances where borrower are able to obtain mortgages without a recent work
history. These instances include recent college grads getting their first job, or
borrowers on some type of fixed income such as 102Social
Security or 205Permanent Disability
In order to use the above as income, the borrower would need to prove that the above
payments were to continue for at least three years.
Can I use my Social Security income to qualify for a mortgage?
If a borrower can prove that the benefit will continue for at least three years, that
icome may be used for the purpose of qualifying for a mortgage.
Can I use my GI bill income to qualify for a mortgage?
Unfortunately, a veteran receiving GI Bill tuition would be unable to use this as
income, as it is dependent on the borrower remaining in school, even if they paid their
tuition from another source.
Can a real estate agent or builder make me use their lender?
Absolutely not, and this illegal act is called steering. Sometimes builders or
real estate companies will have their own in-house mortgage companies, but even so, they
are required to allow a borrower use who they want. They are also required to offer
the same contract terms, regardless of who the lender is. Their lender of choice
can legitimately offer a borrower a better deal than another lender, but the borrower is
still free to choose who they want to use.
What is a Commitment Letter?
This is a letter given by a lender, to a borrower while they are in the process of
obtaining home financing. This letter lets some third party, usually a real estate agent
know, that the borrower is fully approved, or very close to it.
A commitment letter is different though, than a190
prequalification letter, where a lender gives an initial indication that a borrower
appears to be qualified to purchase a home. This letter is given out when the lender
is in process of approving a borrower.
What is a Leaseback Agreement?
A Leaseback agreement is where a property is sold, then the seller leases, or rents the
property back to the buyer.
What is a Land Contract?
A Land Contract is an agreement between a buyer and a seller, often on an investment
property, whereby the buyer agrees to rent the house to the buyer for a specific period of
time, with the intent of purchasing it at the end of the contract for a set price.
This is used in situations where the borrower wants the house, but either is lacking in
a down payment, or is unable to qualify due to credit issues. The purchase price is set at
the beginning of the term, and rent payments at times can be used toward a down payment.
Sellers should always know the financial position of a potential borrower when
entering into a land contract, and account for the fact that the buyer, at the end of the
contract may be unable to purchase the property. Land contracts should always be reviewd
by a real estate attorney.
What if I have employment, or job gaps?
Not necessarily. Depending on the length of time, how recently, and for what
reason they occurred, the lender might ask for a 134letter of explanation
to learn the circumstances of the situation. A job gap five years ago that lasted
three months due to a career change will probably have little effect, provided that there
has been consistent employment since. More recent gaps though would potentially have
more of an impact.
Does my real estate agent have the right to know my credit information?
Absolutely not. If you are purchasing a home and were referred to a loan
professional by a real estate agent, your information is just between you and your lender.
One exception to a real estate agent seeing credit information would be when the
borrower decides they want to rent, versus buy, and the real estate agent is acting as a
rental, or leasing agent, and is verifying the 197creditworthiness
of a potential renter.
Can I write off Mortgage Insurance on my taxes?
Normally you can write off 8mortgage insurance, along
with your mortgage interest and property taxes. Check with your tax professional for
more details.
If I am recently divorced, will the credit of my spouse affect me?
Any items that are on a 197credit report, regardless of
whose names the items are in will have an effect the overall credit picture. This includes
collections and judgments that occurred on credit lines that were held jointly, but are
now closed. Once credit becomes separate though, the credit of one spouse should
have no effect on the other.
What is a Credit Reporting Agency?
A company, which is different from a 199credit bureau
that collects information from several credit repositories, including credit bureaus,
merges all the information and puts it into one report, often called a tri-merge.
This report then goes to lenders, and other agencies that order credit reports for
the purpose of evaluating borrowers.
What does it mean to Waive Homestead?
Homeowners have in some states what is called the Right of Homestead. This
shields creditors from being able to take their home in case of default. In the case
of a mortgage, lenders may have the borrower sign a Waiver of Homestead, saying in effect
that the lender has the right to take the property in the case of default on that
mortgage.
Please consult your attorney for more details on this, please consult your attorney.
What if I was late on a mortgage payment?
Depending on when it happened, it may have little effect. Lenders like to see
mortgage payments current for the 24 months prior to credit being pulled. This will
demonstrate that the borrower has been able to manage the payment for that period of time.
Lenders will often ask for a Letter of Explanation as to why the payment, or payments
were late, especially in the case of 193Rolling Lates.
There may have been a legitimate reason, and they need to know this.
What if I have late payments on my credit report?
Late payments are calculated into your credit score, and the older that the late
payments are, the better. The more recent the payment, especially on a mortgage
would indicate to a lender that there are currently issues in being able to make payments.
If there was a legitimate reason for the late payment, such as financial hardship or a
medical reason, and your loan professional should be asking these questions, the
underwriter may ask of a 134letter of explanation.
Do I have to disclose all of my income and assets when applying for a mortgage?
No. You only need show those that you want to use in the application. Keep
in mind though that the more that you show, the stronger your profile will look in the
eyes of the lender.
Income, including work paid for in cash is undocumentable, and would be unable to be
used. A side business that can be documented by a tax professional can be used.
The types of assets that can be put on an application are anything liquid, meaning
checking accounts, savings accounts, 401K accounts, and mutal funds. Cars, and other
asset-type items are ineligible, as it may take time to sell them.
Can I use a gift from a family member to help buy a house?
Yes. The relative must be a close relative such as a parent, child, or sibling.
The person giving the gift must fill out what is called a Gift Letter, stating that
the money is to be used for the purchase of a specific property, and there is no
expectation of a repayment.
They must also document where the money came from, as in a bank statement, showing that
they have the ability to give. The borrower will then document the money going into
their own account with some type of verification of deposit, such a deposit slip.
How much of a Seller Credit can I get when I buy a house?
FHA allows up to a 6% seller credit toward closing costs. This money can only be
used for costs associated with the purchase, and would be unable to be applied
toward any type of down payment.
FHA used to allow what was called a 140Down Payment
Assistance Program that allowed a seller credit to act as a down payment, but those
have gone away. The borrower still must come up with at least 3% of their own money.
Are mortgage rates higher for an investment property than on a primary
residence?
Yes they are. Lenders know that renters, and streams of income they provide can
be unpredictable, making investment properties riskier investments than a home someone
intends to occupy as their 213primary residence.
If I am self employed, can I still get a mortgage?
Yes, self employed people can get a mortgage. Whether you are a sole proprietor,
in a business partnership, or are a majority shareholder in a corporation, you are
eligible to get a mortgage.
Lenders are looking for a two year history of documented income, preferrably by a CPA
or accounting firm, as well as assets. If you are 130recently
self employed, you may have more of a challenge though, as your income will be
prorated over the two years.
If I recently became self employed, can I still get a mortgage?
Recently self-employed borrowers are in a precarious position in that most lenders want
two years of documented income as a self employed person. If a borrower has been
self enployed for over one year, but less than two though, the lender can spread the
documented income out over two years.
This calculated income will come out to a lower monthly average than they were making
over the first year, but it might be high enough to qualify for a mortgage. Once
they can get to two years, they will be able to use their full income to qualify.
What does floating, versus locking a rate mean?
Floating a rate, versus locking a rate, means that a borrower is choosing to wait on
securing the rate for their mortgage while they continue through the application process.
This is also common if a borrower is purchsing a home, form either a private party
or a builder that will close several months from the contract date, and they expect the
rates to drop between now and then.
Should I compare lenders when deciding on who to use to get a mortgage?
Absolutely you should compare lenders. As a consumer of any product, including
cars and appliances, you want to know that you are getting the best product for your
needs, and that the person you are working with is looking out for your best interest.
A good way to do this when shopping for mortgages is to compare
26Good Faith Estimates between different lenders. A Good
Faith Estimate is a listing of all of the fees that the lender anticipates paying in
the course of obtaining a loan. Borrowers, by law, get these on both purchase and
refinance transactions, within a few days of the loan application.
What if I recently changed jobs?
- Adjustable Rate Mortgages, including 73home equity
products
- Credit Cards
- Car Loans
Fixed Rate Mortgages are based on bond
rates, and are indirectly related to what the Fed is doing.
If I buy a multi family building and live in one unit, is it considered an
investment property?
As long as a borrower lives in the home that they are purchasing, up to four units, and
with a residential mortgage, it is considered a primary residence. If they live elsewhere,
it is considered an investment property.
How much do appraisals cost?
An appraisal for a typical single family home should cost in the range of $250 to $400,
but may vary.
Can I get my credit report updated quickly if I need to?
Some credit reporting agencies offer rapid turnaround in situations where credit
reports need to be updated, for review by the lender. This may include showing
161collections or 160judgments
that have been paid off. Often these items can take months to find their way to a
credit report through normal channels.
A benefit to this is that, in addition to having an item updated, the credit reporting
agency will update the credit score as well. Items can sometimes be turned around in
a few days. The drawback though is that these can be quite expensive, in that these
agencies charge per borrower, per tradeline, and per 199credit
bureau that needs to be updated.
What is an improved lot?
An improved lot is one where utilities such as gas, water, sewer, and electric have
been put in place. This is important information for lenders of
87lot loans in making a lending decision.
How does the movement of the stock market affect fixed mortgage rates?
There is no direct correlation, but the nature of the market is such that when stocks,
or equities as they are called, are rising in value, the potential for a high rate of
return is great. This return is greater than on bonds, where investors tend to put
their money when stock returs are low.
Fixed mortgage rates are more directly correlated to rates of return on bonds.
The bond rate is affected indirectly by the stock market.
Do I have to live in a property that I have a mortgage on?
No. With the obvious exception of an investment property, there are two other
cases where a borrower would live somewhere other than a property that they owned.
They are:
- Some lenders allow what is called a non-occupying co-borower. This means that two
people own the property, but the borrower, unable to qualify on their own uses the income
and assets of the co-borrower, who will live elsewhere.
- A 16Kiddie Condo borower, often a college student, or
recent graduate who uses the income and assets of the co-borrower, usually a parent, who
also lives elsewhere.
How far away do two houses have to be for one of them to be considered a 2nd
home?
Lenders, when taking applications for 2nd homes, need to know how far away that home is
from the the 213primary residence, or the main home of the
borrower, and why they are buying it.
If the borrower has a legitimate reason for buying it, say they have a long commute and
want to stay at the second home during the week, and return home on weekends, that is
likely to happen. If the property is two miles away from where the borrower lives,
it is likely to be considered an investment property.
Does my spouse have to be on the mortgage or title with me?
No. At closing, they will sign documents as if they were going to own the
property, then legally waive their rights to ownership through what is called a
36Quitclaim Deed. The Quitclaim Deed is prepared by an
14Attorney, signed by both spouses, then recorded with the
other legal documents, such as the mortgage.
How many people can be on a mortgage?
Threre is no limit, but both the income and liabilities of all borrowers on the loan
will be used.
How much Property Insurance am I required to carry on my house?
Lenders require enough coverage to cover the replacement costs of the dwelling,
regardless of the market value.
What does payment in arrears mean?
Payment in arrears means that interest is paid the month after it is used.
Example. If a borrower closes on a house April 15th, he will make his first payment on
June 1st. There will be no payment made in May. Being payments are in arrears, that
June payment will be for interest for the month of May.
To cover the interest from April 15th, the day of the closing, to the end of the month
of April, the lender will collect that money at closing, in the form of pre-paid interest.
What is involved in getting prequalified for a mortgage?
It is a matter of taking an application to determine income, assets, liabilities, and
credit history. This process takes anywhere between 15 and 45 minutes, and once your
loan professional has the infomation, they can issue a pre-approval letter.
This letter, based on the accuracy of the information provided, can be given to a real
estate agent, or potential seller. After the application, the lender begins the
process of verifying the information provided, and, if everything is verified, will isssue
a full approval letter.
The lender may charge an application fee, often refundable or credited at closing.
Depending on the current mortgage rates, a rate may be 131locked
or 131floated. A borrower must have a signed real
estate contract to be able to lock a rate.
What if I have a judgment on my credit report?
Judgments are items on credit reports that have been placed there by a legal body, such
as a court, as a result of some type of unpaid lien that a creditor is trying to get
resolved. This can be some type of collection. Most lenders will want
these judgments paid off, either before, or at closing.
The reason that lenders want these paid off is that if the borrower defaults on the
loan, there is a chance that a judgment, particularly a tax lien will be paid before the
lender gets paid.
What if I have collections on my credit report?
A collection is a debt that a creditor, after attempting to obtain payment from a
debtor, has turned over to a collection agency. At that time, the collection agency
may report this information to the 199credit bureaus.
Collections on a credit report have an adverse effect.
Their effect will depend on the amount of the collection, and the length of time they
have been on the report. Lenders will usually put less importance on collections that are
medical in nature, but these items will nonetheless, have an impact on a credit score.
What if I have a Federal Tax Lien on my credit report?
What does a mortgage servicer do?
A mortgage servicer is the company, sometimes a third party, that handles the
administrative functions, or servicing of a loan once it has closed. These functions
include receiving and processing of monthly payments from the from the borrower, and the
paying out of the 1escrow account to taxing authorities,
insurance companies, etc.
What is a construction loan?
A construction loan is a loan given to a borrower while they are in the process of
building a house. It is usually a short term loan, and has a variable rate. When the
borrower needs to use money at different times throughout the building process, they will
take what is called a draw.
Once construction is complete, the borrower will pay off the construction loan through
what is called an 166end loan.
What is an end loan?
An end loan is used to pay off a 164construction loan, at
the end of that process.
What is a bridge loan?
A bridge loan is typically used by a borrower when they want to buy one house while in
the process of selling another. This loan in effect bridges the gap between
the purchase of the new home, and the sale of the prior one.
Bridge loans normally run for 12 months, and carry a higher interest rate than a
traditional loan would, in addition to fees associatied with them.
What is amortization?
Amortization is how a loan is repaid.. A traditional 30 yr. fixed rate loan is
amortized, over 30 years. This means that the payments are set up so that, based on the
rate, each payment is the same throughout the life of the loan.
Other variations on this include Interest Only Loans, where, for a set period of time,
usually 10 years, the borrower pays only interest on the loan. After this initial
period, the loan amortizes over the remaining life of the loan. In the above
example, the loan would be paid off during the last 20 years of the loan. The
payment would of course adjust at the end of the Interest only period.
An amortization schedule is a chart that shows the amounts and principal that are paid
throughout the life of the loan.
What does the term Fee Simple mean?
It is a term that indicates who owns the property on title, a document showing
ownership. There are instances, such as in the case of a
93&Group_ID=TXleasehold, where the borrwer is buying, or
building a home that they will own, but on land owned by someone else.
Who is considered a first time home buyer?
A first time home buyer is a borrower that has owned no property for three years prior
to purchasing a home. This includes people that at one time did own a home, but have
either rented, or been out of the country for more than three years.
What does REO mean?
REO stand for Real Estate Owned. This means that the property is now owned by the
lender or bank as a result of a 21foreclosure. Persons
purchasing REO properties are often doing so in the form of a 223Short
Sale.
A Short Sale is where the lender or bank agrees to sell the property to a third party
for less than the borrower that had been foreclosed on it owed.
What does occupancy rate mean?
This is terminology used when referring to investment properties. The lender will
expect that there will be times when the property will be vacant, meaning that the stream
of income from the property will be less than 100%. They will then calculate the
income they expect from the property based on this.
Example: If a property rents out for $1,000 per month and the occupancy rate is
75%, which is common, the lender will use $750 as projected rental income, and base their
calculations on that value.
Do I need to be a US citizen to get a mortgage?
Borrowers who are not US Citizens are able to obtain mortgage in this country. Many
lenders, including FHA allow Permanent Resident Aliens to borrow money to buy a home.
Non-Resident Alien programs vary from lender to lender.
Undocumented aliens have available what is called an Itin, where they are able to
obtain financing by providing specific documentation. There are a few lenders that
have these programs.
Can a Permanent Resident Alien get a mortgage?
Many lenders, including FHA programs offer programs to Permanent Resident Aliens.
The borrower must be in the US permanently, and be able to provide the appropriate
documentation. Contact your loan professional for more details.
What does it mean when someone is charged points, or an origination fee?
An origination fee is what a lender charges a borrower as a fee for taking out a loan.
These fees can run anywhere from a half a point, to up to two points or more. A
point is 1% of the loan amount.
An origination fee is different from a discount, or 17buy
down fee, where that money is used to lower the mortgage rate, and is separate from
the origination fee.
What is Yield Spread?
Yield Spread is the fee that a mortgage broker earns from a lender that they use to
finance the home of a borrower. The Yield Spread is based on the rate that the
broker charges the borrow. The higher the rate, the more Yield Spread the broker
will make. Keep in mind though that the higher the rate they charge, the less
competitive the broker will be in the face of other lenders.
One benefit of Yield Spread is that a broker can give some of it back to the borrower
in the form of a Broker Credit, to go toward 91closing costs,
so the borrower would need to have less money ar closing.
What is an Assumable Mortgage?
An Assumable mortgage is one that can be transferred from a seller to a buyer.
Once assumed, the buyer becomes responsible for repaying it. These
types of mortgages are more common with FHA and VA loans, and very few, if any
conventional loans are assumable.
What is a Wire Transfer Fee?
A Wire Transfer Fee is a fee charged by the lender, 30Title
Company, or escrow company for transferring or receiving wired funds on behalf of the
Buyer or Seller in a real estate transaction
What is a recording fee?
A recording fee is a fee charged by a title company to deliver, after a loan closing,
to the county or other taxing authority, legal documents, such as a mortgage, or a
47quitclaim deed which need to be recorded there.
What is prepaid interest?
Prepaid interest is the amount of mortgage interest charged to the borrower, from the
date of the closing, to the last day of the month in which the closing took place, and is
paid at the closing. Interest is paid in 158arrears,
and this will cover the interest until the first payment, which is usually the 2nd month
after the month of the closing.
What is Flood Insurance?
Flood insurance is a policy required by lender if a property is determined by FEMA
(Federal Emergency Management Association) to be in a 184Flood
Zone.
How do I know if my house is in a Flood Zone or Flood Plain?
To determine if a property is in a flood plain, borrowers can contact either FEMA at
href=msc.fema.gov/msc.fema.gov, or an insurance agent that can
write a flood plain policy.
What is an Upfront Mortgage Insurance premium?
This is a term used in regard to FHA loans. An Upfront Mortgage Insurance
Premium, sometimes called an Upfront MIP is a one time premium that FHA charges borrowers
when they take out loans through them. This is normally 1.75% of the loan amount.
This is different than the monthly MIP, which FHA also charges borrowers. If the
borrower refinances one FHA loan into another FHA loan in what is called a
212streamline refinance, some of this upfront premium will be
refunded, the amount based on how long the borrower had the first loan.
What is residual income?
This is a term used mainly in loans taken through the Veterans Administration. It
means the amount of money a lender expects a borrower to have left over each month after
taxes have been taken out, and after paying all of their bills and other expenses.
This number is used in calculating a borrowers 13debt
ratio, to determine what size mortgage they will be able to afford.
This formula is a bit different than what would be used in a conventional loan, or even
an FHA loan,where gross income, meaning income before taxes is used in
calculating ratios. Conventional and FHA loan programs also disregard residual income.
What is a form 4506-T?
This is a document that a borrower signs allows the lender to pull their Federal Tax
Returns. Lenders will often use this to check if the income and/or tax returns that
the borower provided are consistent with what they put on the application.
This is an important document, escpecially when the borrower is self employed and has
taken out a Stated Income loan, where no income is verified.
What is a Deed of Trust?
The document used in some states, in place of what other states call a mortgage, to
secure the repayment of money borrowed.
What is a Prequalification Letter?
This is a letter given by a lender, to a borrower while they are in the process of
obtaining home financing. This letter lets some third party, usually a real estate agent
know, that, based on information that the lender has obtained from the borrower up to that
point in time, that the borrower is likely to be approved for a specified amount of money.
A prequalification letter is different though, than a 108commitment
letter, which means that the borower has been fully approved, or is close to it, most
likely after they have found a property to purchase and are near the closing date.
What are reserves, and how much do I need?
Reserves are liquid assets that the lender wants the borrower to have access to, in the
event they find themselves short of funds when the mortgage payment is due. By
liquid, they mean something like a checking or savings account, a Money Market, or a 401K.
Items such as cars would be unable to be listed as assets, as they may take time to
sell.
Lenders typically, on a 213primary residence require two
months of reserves, enough to cover the mortgage payment, taxes, homeowners insurance,
and any homeowners association dues. On an investment property, lenders look for
assets in the range of six months, as it may take several months to rent a
property that has become vacant, for whatever reason.
What is the Settlement Cost Booklet?
The Settlement Cost Booklet is a publication put out by HUD, and is designed to educate
buyers about the home buying process, including specific costs associated with it.
It gives a breakdown of all costs on the 54HUD-1,
which is a form which is to be given by law, by the lender to the borower, at closing,
under the RESPA act. The HUD-1 shows all costs to the borrower, and the seller in
case of a purchase transaction.
What is a rolling late payment?
A rolling late is a missed payment on a loan that has never been caught up on.
Example: Lets say a borrower misses a mortgage payment, in June. If on July
1, they make the regular payment, the lender will accept that payment as the June
payment. The June payment is now current and the July payment is now late.
In August, the cycle will repeat itself. Until that lender gets the missed
payment, they will continue to roll the payments over each other, and the credit report
for the borrower will show that each payment was 30 days late.
What is a Biweekly mortgage?
A Bi-weekly Mortgage is one where payments are made every two weeks, or 26 times a
year, the equivalent of 13 payments. When looking at bi-weekly mortgages, borrowers
need to know exactly what they are getting, as there are often fees to have this payment
arrangement.
Chances are that if you are using a 163servicer to make
your payments for you, they are only paying the lender once a month anyway, and floating
your money the rest of the time. If this arrangement is convenient, and costs are
not an issue, by all means do it.
If your only reason for doing this is to reduce principal faster, you could take 1/12
of the principal and interest portion of you payment and add it back to your payment each
month. This would do close to the same thing as the Biweekly mortgage, with no
additional expense, and take six to eight years off of a 30 year mortgage.
How much interest will I save by having a 15 year mortgage, versus one for 30
years?
On a $200,000 loan at 6.25% for 30 years, the borrower will pay $1,231.43 per month in
principal and interest. If they keep the loan for the entire 30 years, they will
have made payments totalling $443,316.
If the borrower instead took out a 15 year loan for the same $200,000, this time paying
6%, because rates on 15 year loans are normally lower, their monthly payment would be
$1,687.71 per month. If they keep the loan for the entire 15 years, they will have
made $303,788 in payments.
The difference in the total payments made would be $139,527. Keep in mind though
that the difference in payment would be $456 per month, which is significant.
Although, if a borrower made 1/12 of a payment extra, or $102.61 per month on the
30 year loan, they would reduce the term of the loan by close to seven years, and save
almost $75,000 in interest.
What does credit have to do with the mortgage process?
Credit is a tool which lenders use to assess how a borrower is able to manage
their credit. Companies and financial institutions that lend money to people report to
what are called credit reporting agencies. These credit reporting agencies;
TransUnion, Equifax, and Experian generate what is called a credit report, and take into
account many factors in determining a credit score. These factors include:
- Length of credit history
- How much credit a borrower has available
- Balances versus limits
- Late payments
- Collections and judgments, if there are any
All three bureaus use the same model in determining a credit score, and lenders usually
use the middle of the three scores. Scores will vary from bureau to bureau because
they receive information at different times.
What is a primary residence?
A primary residence is place where a borrower intends to live, most of the time.
In the eyes of lenders, a borrower may have only one primary residence.
They may also have one 1542nd home, but all the properties
thereafter are considered investment properties.
What is a Home Inspection?
A Home Inspection is an inspection of a property by a licensed professional that will
check structural and mechanical aspects of the property, to determine if any work needs to
be done. These aspects include the roof, electrical and plumbing systems, and things
like mold and Radon, if they are specifically licensed to.
Home inspections are not required, but are highly advisable, even on new construction.
Many purchase contracts allow time to get one done, so issues, if issues are found,
they can be addressed before moving forward with the purchase agreement.
A home inspection is different from an 40appraisal, in
that an appraisal goes into far less detail on specifics of the property, but give a
market value to the property as it relates to comparable properties.
What is the Right of First Refusal?
The right of first refusal is right exercised by a group, particularly a Homeowners
Association,or218 218HOA. This gives them the right to
approve or disapprove of a potential buyer of a condo or townhouse within the association.
Should the association disapprove a buyer, the association can then buy the
property themselves.
What is an HOA?
HOA stands for Homeowners Association. This is an association within a
10Condo, Townhouse, or Planned Unit Development (
201PUD). They manage the affairs of the association, from
ensuring that rules in the association by-laws are adhered to, to hiring and managing
service professionals such as landscapers and painters.
What is the Secondary Mortgage Market?
When a consumer takes out a mortgage loan, escpecially when that loan is through a
lender that uses 11Fannie Mae or Freddie Mac guidelines,
that mortgage will most likely be pooled with other mortgages into securities that are
called Mortgage Backed Securities, or MBSs.
These securities are bought and sold on what is called the Secondary Mortage Market
What is a Mortgage Underwtiter?
An underwriter is the person at the lender whom, after reviewing all of the borrower
information presented to them in the loan package, makes the decision to lend money to the
prospective borrower.
Who is considered self employed?
Persons that are self-employed are any of the following:
- A Sole Proprietor
- A person in a partnership
- Someone having at least a 25% ownership stake in a business.
Can I buy an investment property using an FHA loan?
The closest that a borrower can come to buying an investment property using FHA would
be a multi-unit residential property of up to four units. The borrower must occupy the
property as their 213primary residence.
Rents from all of the units, taken from the comparable rent schedule on the
40appraisal, must be enough to cover the expected mortgage
payment, including taxes and insurance.
What is a Short Sale?
A Short Sale is where the lender or bank of an 172REO
property, usually a foreclosure, agrees to sell the property to a third party for a lesser
amount than the previous borrower owed on it.
six months, as it may take
several months to rent a property that has become vacant, for whatever reason.
Can I make a partial mortgage payment if start to fall behind?
Unfortunately, when a lender receives a payment that is less than the expected amount,
they will apply it to either the principal, or the escrow account, but would be unable to
accept it as a full payment. If less than a full payment is recieved, the payment is
considered late, and all subsquent payments will constititute a
193rolling late, until the payment that was missed is made up.
Can I keep my Current Residence, rent it out, then buy another home to live in?
This is possible, but if this is the borrowers first time being a landlord, they would
need to show enough income to cover both homes. Once they have established
a two year history of managing rental properties, they can use the rental income.