Chances are, you’re not the first person to ask. Take a look at answers to some of our more frequently asked questions.
The alternative to working with a broker is to call up dozens of lenders and compare their mortgage terms and rates on your own. A broker saves you the time and headache of having to do that. Mortgage brokers have regular contact with a wide variety of lenders, some of whom you may not even know about.
Reputable lenders will especially want to find out more about you before throwing out loan options. You wouldn’t expect a doctor to suggest surgery before assessing your medical situation, so choose a broker who gathers enough information from you before recommending a particular type of loan.
Ask the lender to thoroughly explain the pros and cons of fixed rate loans, adjustable rate loans, interest only loans, and negative amortization loans.
The interest rate never changes with a fixed rate mortgage, so you’ll know what your monthly payment is until you make the last one. An adjustable mortgage rate depends on the market, so it can fluctuate, but typically not within the first five years.
An interest only loan comes with a ‘balloon payment’ of the entire principal balance at some point—all at once. You’ll pay only interest in the meantime.
A negative amortization loan defers some portion of interest for a period of time.
Talking to your lender and questioning these options can help you determine which is right for you and your personal financial situation.
It’s generally a good time to refinance when mortgage rates are 2% lower than the current rate on your loan. It may be a viable option even if the interest rate difference is only 1% or less. Any reduction can trim your monthly mortgage payments.
Example: Your payment, excluding taxes and insurance, would be about $770 on a $100,000 loan at 8.5%; if the rate were lowered to 7.5%, your payment would then be $700, now you’re saving $70 per month. Your savings depends on your income, budget, loan amount, and interest rate changes. We can help you calculate your options
A loan’s annual percentage rate (APR) is derived through a complex calculation that includes the interest rate and all the other related lender fees divided by the loan’s term. Not all brokers compute APR correctly, and there’s no way to accurately compute an APR rate for an adjustable loan. An APR does not account for early payoffs.
Questions to ask your mortgage lender include pinning down the adjustment frequency if your interest rate is adjustable, as well as the maximum annual adjustment, the highest rate or cap, the index, and the margin.
The costs of a loan include not only fees that go to the lender, but also related third-party vendor fees. These can include appraisals, credit report, the title policy, pest inspection reports, escrow where applicable, recording fees, and taxes.
An estimate of these fees should be accurately included in a document called the Loan Estimate, which federal law requires that the broker give to you. Lenders are required to deliver the Loan Estimate when an application has been completed. It should include the name of borrower, Social Security number, the property address, an estimated value of the property, the loan amount, and the borrower’s income.
You should ask for an estimate of these costs upfront before you apply for the loan.
Title insurance policy protects a lender against any loss resulting from a title error or dispute. A title insurance policy also protects a home buyer if a home buyer purchases a separate policy, called owner’s coverage. All mortgage lenders require lender’s title insurance coverage for an amount equal to the loan. It lasts until the loan is repaid. Similar to mortgage insurance, the borrower pays the title insurance premium at closing.
Mortgage rates can change from the day you apply for a loan to the day you close the transaction.
If interest rates rise sharply during the application process it can increase the borrower’s mortgage payment unexpectedly. Therefore, a lender can allow the borrower to ‘lock-in’ the loan’s interest rate guaranteeing that rate for a specified time period, often 30-60 days, sometimes for a fee.
Prepayment penalties are no longer allowed in some states, so it’s important to ask about this. These penalties let the lender collect an additional six months of ‘unearned interest’ if you pay your loan off early, either through a refinance or the sale of the property.
Be sure to ask how much the penalty is if you’re buying in a state where they’re permitted. Ask about the terms of the prepayment. Some are only in effect during the first two to five years of the loan. Ask if the prepayment penalty would apply if you refinanced through the same lender at a later date.
The average loan processing time falls between 21 and 45 days. You must include a closing date to properly write a purchase contract, so you’ll have to coordinate this date with your lender.
Ask about the anticipated turnaround time, find out about any anticipated obstacles that could hold up closing, and how long after final application approval will the loan fund.
Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points — a credit score — helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.
The most widely use credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. Your score will fall between 350 (high risk) and 850 (low risk).
Because your credit report is an important part of many credit scoring systems, it is very important to make sure it’s accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:
Equifax: (800) 685-1111
Experian (formerly TRW): (888) EXPERIAN (397-3742)
Trans Union: (800) 916-8800
You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion.
On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home, mortgage lenders usually require you to get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage.
Sometimes you may need to pay up to 1-year’s worth of PMI premiums at closing which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment, or ask about other loan program options.
Closing your transaction on time is a big issue. Yes, your purchase contract will include that date to close escrow, but it’s generally subject to the lender’s ability to close on time.
It can mean extra costs or problems for you if the lender can’t do that for one reason or another. Ask about any increase in the interest rate if your lock-in expires, and what happens with any additional expenses that you might incur if you have to pay movers to reschedule. Find out how these costs and other costs are addressed.
LTV stands for loan-to-value ratio. This is calculated by the total amount of loans (liens) on the property divided by its fair market value. The higher the LTV, the riskier the loan is for a lender. If the subject property is a purchase transaction, fair market value will be based on the lower of purchase price or estimated market value as established by the appraisal.
Below is a list of basic documents that are required when you apply for a mortgage. However, every situation is unique and you may be required to provide additional documentation.
- If you and your spouse are applying for the loan, social security numbers for both you and your spouse
- Consecutive pay stubs for the last month
- Copies of your checking and savings account statements for the past 6 months
- Evidence of any other assets like bonds or stocks
- List of all credit card accounts and the approximate monthly amounts owed on each
- List of account numbers and balances due on outstanding loans
- Copies of your last 2 years of income tax statements. Depending on your lender, you may be asked for other information and documents as well
Points are costs that need to be paid to a lender to get mortgage financing under specified terms. Discount points are fees used to lower the interest rate on a mortgage loan by paying some of this interest up-front. Lenders may refer to costs in terms of basic points in hundredths of a percent, 100 basis points = 1 point, or 1% of the loan amount.
A point is a percentage of the loan amount, or 1-point = 1% of the loan, so one point on a $100,000 loan is $1,000.
At closing, the ownership of the property is officially transferred from the seller to you. This may involve you, the seller, real estate agents, your attorney, the lender’s attorney, title or escrow firm representatives, clerks, secretaries, and other staff. You can have an attorney represent you if you can’t attend the closing meeting (e.g. if you’re out-of-state). Closing can take up to several hours depending on contingency clauses in the purchase offer, or any escrow accounts needing to be set up.
Most paperwork in closing or settlement is done by attorneys and real estate professionals. You may or may not be involved in some of the closing activities; it depends on who you are working with.
Prior to closing, you should have a final inspection, or ‘walk-through’ to ensure requested repairs were performed, and items agreed to remain with the house are there such as drapes, lighting fixtures, etc.
In most states, the settlement is completed by a title or escrow firm to which you forward all materials and information plus the appropriate cashier’s checks so the firm can make the necessary disbursement. Your title/escrow representative will deliver the check to the seller, and your real estate agent will give the keys to you.