Frequently Asked Questions
Can I apply for a mortgage loan before I find a property to buy?
Shopping for a new home can be exciting and overwhelming at the same time. Advanced preparation regarding your mortgage financing set you at ease. Applying for a mortgage loan before you find a home may be the best thing you can do. When you apply in advance, we issue a Pre-qualification letter or Certificate of Mortgage Eligibility letter depending on the type of review, subject to you finding your new home. You can use these letters to assure real estate brokers and sellers that you are a serious, qualified buyer. This pre-planning will make you comfortable that you are looking in the right price range for your budget and that are qualified for financing.
How long does the process typically take to obtain a mortgage?
The standard processing time is 45 days, however, there are many cases that occur before and after this time period. For purchase transactions, we would within the closing date noted within the contract. Before signing, be sure you leave at least 30 days from time of application to closing at minimum. For refinance transactions, most loans are rate locked, therefore there is a rate expiration that needs to be met. Typically rate locks are 45 or 60 days. You would need to close within this time frame to not jeopardize your rate expiring.
Should I refinance my existing mortgage?
Deciding whether to refinance a mortgage is usually all about the numbers. Whether you're seeking a lower monthly payment or looking to shorten the length of a mortgage, refinancing makes sense when you can reduce the costs of the loan. There are however, many times you refinance for other reasons other than lower costs. One may want to change the term of the loan, change from product (i.e. from ARM to Fixed) or in many cases, refinance for a higher loan amount to take cash out to be used for various reasons (debt consolidation, investments, tuition, etc). Whatever the reason may be, you want to regularly consult your mortgage specialist to see if refinancing would help your overall financial situation.
What happens during the mortgage process and how is the lending decision made?
Your application is completed with a Loan officer and then the application will be processed in order to build a file that is fully documented to support the information that is noted within the application. Some of the typical documents include a credit report, appraisal, income documents (paystub, w-2, tax returns, ) asset documents(bank statements) and a Purchase and Sale agreement, in the case of a purchase transactions. When complete, loans applications are reviewed by an underwriter, who examines your credit history, your income, your assets, your property value, and your debt-to-income ratio. These are the main factors which describe you as a mortgage applicant. This perceived level of risk determines your loan decision as well as your interest rate in some cases.
What is included in a credit report and what are FICO scores
A report containing detailed information on a person's credit history and identifying information on that person. The report includes credit activity on accounts like, credit cards, car loans, student loans and home loans. Bankruptcies, foreclosures and late payments, as well as recent credit inquiries are also provided. We require the credit report as part of the application process, with the borrower's permission, to determine his or her creditworthiness. There are three major credit reporting bureaus: Experian, Equifax and TransUnion. There three companies maintain a credit report on everyone with credit history, however they all may not all have the same information within. We require a tri-merge credit report for mortgage lending. Because your information can differ between bureaus, it is important to check all three of your credit reports occasionally to ensure that the information is correct and up to date. Each bureau has an online form that you can complete to try to fix any errors.
The items on your credit report are graded and your credit score (FICO SCORE) is formulated from the data. These three numbers could end up saving you hundreds, or even thousands, of dollars. Lenders use credit scores to help them determine the "credit worthiness" of borrower when applying for a home loan. The applicant's credit score will be used when determining whether he or she qualifies for credit, and if so, what terms and interest rates he or she will receive. FICO scores range from 300 to 850, whereas the higher there score, the lower risk.
The following 5 criteria are factored into determining your credit score:
Payment history: (35 percent) -- Your account payment information, including any delinquencies and public records.
Amounts owed: (30 percent) -- How much you owe on your accounts. The amount of available credit you're using on revolving accounts is heavily weighted.
Length of credit history: (15 percent) -- How long ago you opened accounts and time since account activity.
Types of credit used: (10 percent) -- The mix of accounts you have, such as revolving and installment.
New credit: (10 percent) -- Your pursuit of new credit, including credit inquiries and number of recently opened accounts.
Personal or demographic information such as age, race, address, marital status, income and employment don't affect the score. Credit scores are calculated based on data in your credit reports, which can change daily. For this reason, it’s extremely important to stay on top of your credit reports for changes that could affect your credit scores.
What is an appraisal and who completes it?
An appraisal is a written report that describes and determines an estimate of the value of the property. National standards govern not only the format for the appraisal; they also specify the appraiser's qualifications and credentials, how the appraisal should be ordered and who can have discussions with the appraiser. There are also licensing requirements for appraisers evaluating properties located within their states.
The appraiser will inspect both the interior and exterior of the home. After the appraiser inspects the property, he or she will compare the qualities of your home with other homes that have recently sold within the neighborhood, typically within 1 mile. These homes are called comparables and play a significant role in the appraisal valuation process. The appraiser will weigh the major components of these properties (i.e., design, square footage, number of rooms, lot size, age, etc.) to the components of your home to come up with an estimated value of your home. The appraiser adjusts the price of each comparable sale, up or down, depending on how it compares, better or worse, with your property.
Also within the report, as an additional check on the value of the property, the appraiser also estimates the replacement cost for the property. Replacement cost is determined by valuing the land and estimating the cost to build a house of similar size and construction. Finally, the appraiser reduces this cost by an age factor to compensate for depreciation and deterioration. In cases where the home will be used for investment purposes, the appraiser will also consider the rental income that will be generated by the property to help determine the value.
Using these methods, an appraiser will frequently come up with slightly different values for the property. The appraiser uses judgment and experience to reconcile these differences and then assigns a final appraised value. The comparable sales approach is the most important valuation method in the appraisal because a property is worth only what a buyer is willing to pay and a seller is willing to accept. This is the approach that is used in mortgage financing.
Appraisals are ordered early on in the process and is a critical part to the decision making process. Appraisals are ordered through an Appraisal Management Company (AMC), to independently assign an appraiser to the property. The appraisal is assigned to an experience appraiser within the location of the property. The appointment is made and the inspection occurs. Once the appraiser has completed the report, it is submitted back to the AMC for quality assurance, prior to being released to the lender. If the appraised value comes in lower than the sale price or the estimated value, a dispute process is allowed. The report should be reviewed for any errors and to be sure the best, most up to date comparable sales are being used. Typically a form is to be completed to include erroneous information and additional supportive information that may have been missing from the original. This information is submitted back to the appraiser for consideration. If deemed accurate, value could be reexamined and changed. If not, value remains as is.
Some products are accepting the automated valuation models (AVMs). These rely on statistical models. AVMs constitute a mass-appraisal approach, relying upon generally available characteristics. They AVM does not involve visits to the properties to determine condition or incorporate local knowledge, so that their variances may be much higher than the variances of standard appraisals. While AVMs can be quite accurate, there is also evidence that AVMs are not as accurate due to this general data approach. The Home Affordable Refinance Program (HARP) products, typically allow for an AVM. The lender will notify if an AVM is acceptable as part of the process.
What is the difference between Interest rate and APR?
The interest rate is the cost to borrow the money disbursed in the loan and what your monthly Principal and Interest payment is based on. The APR is the total cost of the loan over its life, including costs, points and fees. For this reason, the APR is typically higher than your interest rate. One should not make their decision on APR, but to get a full explanation of the interest rate and all the costs associated with the loan, since the APR does not include all costs.
How do I know if I should lock my interest rate or let it float?
Mortgage interest rates change daily and are as hard to predict as the stock market therefore, no one can really know for certain whether they will go up or down. If you have a feeling that rates are on an upward trend then you may want to consider locking in your interest rate as soon as you are able. Before you decide to lock, make sure that your loan can close within the lock in period. If you are purchasing a home, review your contract for the estimated closing date to help you choose the right rate lock period. If you are refinancing, in most cases, your loan could close within 45 or 60 days so be sure the lender offers a long enough rate lock period.
If you think rates might drop during your loan being processed, take a risk and let your rate "float" instead of locking. Floating your interest rate could be risky if you are tight on qualifying. Be sure to check with your Loan officer for the maximum rate you qualify at so if rates rise during the float period, your qualifying and/or approval is not in jeopardy.
Why do I have to pay prepaid interest at time of closing?
When you close your loan, interest accrues in between the closing date and the last day of that calendar month. Mortgage payments are collected on the 1st of each month. The prepaid interest determined at time of closing is added to the closing costs for your loan rather than making your first monthly payment larger in order to absorb the extra that would be due. Most purchase transactions are closed at the end of the month for this reason. In a refinance transaction, the prepaid interest amount is not as critical as a cost, since it would need to paid regardless as a mortgage payment.
What is an Escrow account?
An escrow account is set up and requires borrowers to make monthly payments toward real estate taxes and/or home-related insurance as part of the regular monthly mortgage payment. Bills for the taxes and/or insurance are sent directly to the lender who makes the required payments on behalf of the borrower. The borrower can request a waiver of setting up an escrow account. In most cases, there is a cost for this however, if typically insurance escrow waiver is free of charge. Investment properties always require escrow accounts.
What are closing costs?
A mortgage loan often involves many fees, such as the appraisal fee, credit report, underwriting, title charges, recording fees and state or local taxes. These fees vary from state to state and also from lender to lender. Any lender or broker should providing you with an estimate of closing costs (Good Faith Estimate) It’s important to review fees in detail with your lender/broker as the estimate can be a complicated document. To assist you in evaluating the different fees, here is a breakdown
Closing costs include the appraisal fee, the credit report fee, the settlement or closing fee, the survey fee, tax service fees, title insurance fees, flood certification fees, recording and courier/mailing fees. These are fees that we collect and pass on to the person who actually performed the service. For example, an appraiser is paid the appraisal fee, a credit bureau is paid the credit report fee, and a title company or an attorney is paid the title insurance fees. Typically, you see some minor variances in third-party fees from lender to lender since a lender may have negotiated a special charge from a provider they use often. You may also see that some lenders absorb minor third-party fees
Fees that we consider unavoidable as they will be paid, regardless of who you choose to obtain financing with. Prepaids are items you need to pay as a result of closing and the amounts depend on when you close. Prepaid interest is the interest that you need to pay from the day you close until the end of the month. Since mortgage payments are paid on the 1st of the month, this interest is collect at closing and then your mortgage payment will be the following month, consisting of 1 full month’s payment. Prepaid taxes and insurance will be collected depending when they are next due. Also, an escrow account is to be established, we will collect funds to be deposit into the escrow account at closing so that sufficient funds are available to pay the bills when they become due as well as the appropriate cushion. If your loan is a purchase, you also need to pay for your first year's homeowner's insurance premium prior to closing. We consider this to be a required advance.
Fees such as points/origination, loan processing/underwriting fees are retained by the lender and are part of providing you with the lowest rates possible. This is the category of fees that you should compare very closely from lender to lender before making a decision. Depending on the pricing of your loan, you will either be charged a discount point (% of the loan amount in terms of a fee) or a credit (% of the loan amount in terms of a credit). Credit pricing can be used to offset closing costs. The higher the discount points, the lower the rate…the higher the credit, the higher the rate.
What is Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) protects lenders against losses that can occur when a borrower defaults on a mortgage. PMI is required on first mortgage purchase transactions when the borrower has less than a 20% down payment. Likewise, it is required on first mortgage refinance transactions when the borrower has less than 20% equity in the property being refinanced. The cost of the mortgage insurance is typically added to the monthly mortgage payment.
Should I get a fixed rate or an adjustable rate?
Fixed-rate loans have interest rates that don't change during the life of the loan. Adjustable-rate loans have rates that are linked to an index, Prime, and therefore can change over time. Consider factors that could affect your decision, such as how a higher monthly payment would impact your budget if the rate were to increase and the length of time you plan to stay in your home.
Frequently Asked Questions