Mortgage Frequently Asked Questions

  1. What things should I remember when buying or refinancing a home?
  2. Should I refinance?
  3. What is an Annual Percentage Rate (APR)?
  4. What is Private Mortgage Insurance (PMI)?
  5. What is a FICO score?
  6. What is the difference between being pre-qualified and pre-approved?
  7. What is a rate lock?
  8. Can my loan be sold?
  9. What happens if my lender goes out of business?

 

What things should I remember if I’m buying or refinancing
a home?

When you’re buying:

Get pre-approved for your mortgage before you start looking. Sellers like dealing with pre-approved buyers, so you’ll increase your chances of getting your offer accepted, especially if you find yourself in a bidding war. Get your pre-approval in writing from your lender.

Don’t make verbal agreements. A written contract always trumps a verbal contract. Make sure every point of agreement is put down in writing.

Don’t select a lender based on rate alone. Make sure you know what the total cost of your loan will be, including the rate, any fees and both discount and origination points. Also make sure that discount points are shown separately from origination points. Look for hidden loan requirements such as prepayment penalties, escrow impound requirements, short-term rate locks or high down payments. Any quotes you get should be for your loan request specifically, and your lender should provide you with a Good Faith Estimate (GFE) of all fees for your loan within three business days of receiving your application.

Begin shopping for home insurance as soon as your offer has been accepted to avoid having to do it at the last minute.

Review every document before you sign it, as far in advance as possible. While it’s not likely that you’ll be able to see every document before closing, some should be available to you.

Make sure to allow for delays. Real estate transactions often encounter delays, so schedule lease terminations and other related activities accordingly to avoid problems.

Refinancing your home

Don’t assume your existing lender is the best choice. Shop around. Other lenders may have better rates and programs. Also, it’s not necessarily easier. Even working with the same lender, refinancing will often follow the same process and require most, if not all, of the same documentation as a first mortgage.

Do a break-even analysis. Once you know the total cost of the transaction, determine how much you’ll save every month. Then divide the total cost by the monthly savings. That gives you the number of months you must remain in your home to break even. Then compare that to how long you plan to stay. If you’re thinking of changing to a fixed loan from an adjustable loan, or changing terms, the situation is more difficult to analyze.

Get a written Good Faith Estimate of closing costs. Your lender should provide you with a Good Faith Estimate (GFE) of all fees for your loan within three business days of receiving your application.
 
Paying for an appraisal when you think your home value may be too low. Have the appraisal company provide a list of comparable sales (typically at no charge) to provide you with a range of possible values. Your mortgage company's appraiser or your realtor may do this for you. Do not waste your money on a full appraisal if you are doubtful about the value of your home.

Don’t confuse tax value with market value. Mortgage companies use market value, not county tax value, in their decisions to make loans.

Review every document before you sign it, as far in advance as possible. While it’s not likely that you’ll be able to see every document before closing, some should be available to you.

To avoid delays, get required documents to your lender as soon as possible. Delays can cost you money as well as time.

Don’t withdraw cash from your credit line before refinancing your first mortgage. Because of some lenders’ cash-out seasoning requirements, if you withdraw cash from your credit line that’s not used for home improvements, they’ll consider the refinance to be a cash-out transaction. Your loan will likely have tougher requirements if you’re approved at all.

Beware taking on a second mortgage before refinancing your first mortgage. Ask first. Your lender will probably look at the combined amount of your first and second loans when refinancing the first, so getting a second mortgage could cause your refinance transaction to be turned down. Check into programs that enable you apply for a first and second at the same time.

Should I refinance?

This can be a difficult question to answer and depends upon your specific situation. The main objective for refinancing is to save money, which may be achieved by:

  • Getting a lower interest rate that reduces you monthly payment.
  • Reducing the term of the loan, which reduces the total interest you pay over the life of the loan.

In this situation, do a “break-even analysis” as described above to help you decide if this is the right decision for you.

You may want to convert your adjustable-rate loan to a fixed-rate loan to capitalize on the security and stability of fixed payments.

You might refinance as a way of consolidating you debts, reducing your total payments, and to take advantage of interest that is tax-deductible.

If you have a loan with a balloon payment and no conversion option, you may have no choice but to refinance. In that situation, the best option is to refinance a few months before the payment is due.

Whatever your reasons for considering refinancing, consult a trusted lender to make sure you understand your options.

What is an Annual Percentage Rate (APR)?

An APR is an interest rate that is different from and larger than the note rate. It is designed to measure the “true cost of a loan” and can be used to compare different loan programs from different lenders. The APR does not affect your payments, which are a function of the interest rate and term of your loan.

The Federal Truth-in-Lending law requires lenders to include the APR in their rate advertising.

While you can use the APR to compare loans, a better yardstick is a good-faith estimate to compare costs. Make sure to exclude any costs that are independent of the loan.

What is Private Mortgage Insurance (PMI)?

PMI is coverage that helps protect lenders from foreclosure costs, and is generally required when you buy a home with a down payment of less than 20 percent. It enables lenders to lower their down payment requirements. Without mortgage insurance, a 20 percent down payment would be required to buy a home.

The less you put down on a home, the higher your monthly PMI premium, which is added to your mortgage payment.

What is a FICO score?

A FICO score is a credit score used by lenders to help predict the likelihood that borrowers will pay their bills. A company called Fair, Isaac & Co. (FICO) developed the formula, which attempts to consolidate a person’s credit history into a single number. The higher the number, the better the credit risk.
Several factors are considered in determining a person’s score, including how long the credit has been established, late payments, used vs. available credit, time at current residence, employment history and “bad credit” information such as bankruptcies, charge-offs, collections, etc.

Three credit bureaus—Experian, Trans Union and Equifax—compute credit scores. Some lenders may use only one of the scores, while other lenders may use the middle of the three scores.

If you find an error on your report, report it to the credit bureau. Your lender may be able to help you.

What is the difference between being pre-qualified and pre-approved?

Being pre-qualified means that you have been interviewed by a lender, who has determined a loan amount for which you may be approved. Pre-qualification is neither a loan approval nor a commitment to lend. Once pre-qualified, the lender will issue you a letter to use when you make an offer to show the seller that you will likely receive loan approval for the purchase.

Pre-approval is a step up from pre-qualification. It means that your financial situation has been documented and verified and that your loan application has been submitted to an underwriter and approved. Once pre-approved, you receive a certificate. Being pre-approved can give you negotiating leverage and enable you to close sooner on your home purchase.

What is a rate lock?

Before you can close a mortgage loan you must lock in an interest rate. A rate lock has four components, including the loan program under which you’re borrowing, the interest rate, any points being paid to obtain the loan, and the term of the lock.
The longer the term, the higher the points or the interest rate, since the lender is taking a risk by letting you lock in a rate. If rates increase, the lender must give you the original rate at which you locked. 

What happens if my loan is sold?

Loans are often sold through a secondary mortgage market that trades in pools of mortgages. Any lender purchasing these loans assumes all original terms and conditions. In the event your loan is sold, you’ll be informed and instructed on where payments should be sent.

What if my lender goes out of business?

If a lender goes out of business, the loans are most often sold to another lender, so your payments will continue with the new lender. Until the time you’re instructed to make payments to the new lender, you should continue making payments to your existing lender.

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