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Q. How will I know how much I can qualify for?
A. By going through a “pre-qualification” interview, we can determine exactly how much home you can qualify for.
Q. What is a “pre-qualification” and is it the same as being “pre-approved?”
A. A “pre-qualification” indicates that you have provided all of the necessary information to your loan officer, either verbally or with documentation. The loan officer has calculated your qualifications and determined how much home you can afford.
To be “pre-approved” you must complete a loan application, provide all necessary documentation and allow your Loan Officer to run your credit report. We will then submit your complete loan application package to the underwriter for a full credit approval.
Q. Is it better to be “pre-qualified” or “pre-approved?”
A. Before showing you homes, a Realtor will want to know that you have been pre-qualified, to insure they are showing you homes in your price range. Without this they could be wasting your time and theirs.
A seller will almost always require a pre-qualification letter, but in a hot market they may only accept offers from pre-approved buyers. Even if a seller does not require you to be pre-approved it will often give you an advantage over other potential buyers because the seller may see your offer as more solid. In addition, with a pre-approval you will be in a position to close an escrow quickly which will often be a deciding factor for sellers choosing among multiple offers.
If time permits, it is always better to be pre-approved.
Q. How can I speed up the approval process?
A. Be sure to respond promptly to your lender's requests for information while processing is taking place.
Be prepared to provide the following typical items:
- The final purchase contract for the house (if applicable).
- Pay stubs for each applicant, showing earnings for the last 30 days and year-to-date earnings. (These must be computer-generated or typed originals that identify the employer and the employee's name.)
- Last year's W2 and 1099 for each applicant. If you're self-employed, the lender may require your personal and business tax returns for the previous two years and your company's year-to-date Profit and Loss statement.
- Account numbers for all bank accounts, along with account statements for the past two months.
- Information about debts, including loan and credit card account numbers and the names of your creditors.
- Evidence of your mortgage or rental payments, such as canceled checks.
- An irrevocable gift letter if you are receiving a monetary gift from a relative.
Q. What are income and debt ratios?
A. The Housing to Income Ratio is your total monthly housing expense divided by your gross monthly income (before taxes). The Total Debt to Income Ratio is your total monthly housing expense PLUS any recurring debts (i.e. monthly credit card minimum payment, car payments, or other loan payments) divided by your gross income. Standard underwriting guidelines suggest a maximum of 28% on the Housing Ratio and 36% on the Debt Ratio, but these ratios can vary based on the loan program, the financial strength of the borrower and the down payment.
These ratios are only “guidelines” and Automated Underwriting Systems (AUS) and expanded criteria programs make it possible to get most anyone qualified for a loan.
Q. What are "Cash Reserves"?
A. Cash Reserves are the funds a borrower has remaining after making their down payment and paying all closing costs. The amount of Cash Reserves varies by loan program, but larger reserves are always a strong compensating factor. Many conventional loans will require 2 months of the mortgage payment in reserve after closing, while most government loans require no reserves.
Q. How much money do I need for a down payment and closing costs?
A. While most conventional loans require a minimum down payment of 5%, many programs exist with lower down payments ranging from zero to 3%. Some programs allow the down payment and/or closing costs to be a gift from a family member. During the pre-qualification interview we will analyze your circumstances and provide you a number of options that will work with your available down payment.
Q. Can I qualify for a VA loan?
A. VA loans, guaranteed by the Veteran's Administration, are strictly for eligible veterans. If you are a veteran we will gladly assist you in determining your eligibility. You will need a VA form 1880, which we will gladly supply, and your discharge papers (DD214). You can mail or take the completed forms to your local VA office. Once they determine you qualify, the VA will present you with a certificate of eligibility that will allow you to obtain financing from any VA approved lender.
VA loans do not require any down payment and in some cases the seller may be willing to pay all or part of the closing costs, allowing veterans to purchase a home with little or no money down. Active military personnel may also be eligible for a VA loan.
Q. What if I don't have any established credit?
A. Some loans, including those insured by the FHA, do not require you to have an established credit history. Other programs will allow us to create an alternative credit history. If you do not have enough established credit, we can work with you to document alternate credit information. If you have been renting, we can obtain a rental rating from your landlord as a way of verifying your payment history. We can also contact your utility companies, phone service, cable companies or car insurance carrier to obtain a rating on your payment history. Not all loan programs will accept alternative documentation on your credit but we will gladly work with you to find one that does.
Q. What if I have had credit problems in the past or have filed bankruptcy?
A. Your payment history is a lender’s primary indicator of your willingness to repay them in a timely manner. Therefore a good credit history is important, but a perfect credit history is not. If you have blemishes on your credit record, including bankruptcy or foreclosure, we can work with you to find the loan program that best fits your needs. Often this will mean a higher interest rate, larger down payment or both. If you are unhappy with the loan options available to you we will analyze your payment history and recommend a course of action for repairing your credit so that you will qualify for another loan.
Q. What is a credit (FICO) score? Is mine good?
A. In a nutshell, credit scoring is a statistical method of assessing the credit risk of a loan applicant. The score is a number that rates the likelihood an individual will pay back a loan. The score looks at the following items:
- Past delinquencies
- Derogatory payment behavior
- Current level of indebtedness
- Length of credit history
- Types of credit
- How often credit is applied for
- Number of credit inquiries
First, a borrower with a score above 680 may be considered an A+ loan. The loan will involve basic underwriting, probably through a "computerized automated underwriting" system and be completed within minutes. Borrowers falling in this category qualify for the best rates available and often will only need to provide reduced documentation.
Second, a score below 680 but above 620 may indicate lenders will take a closer look at the file in determining potential risks. Borrowers falling in this category may find the process and underwriting time no different than the past. Lenders may require supplemental credit documentation and letters of explanation before an underwriting decision is made. Loans within this FICO scoring range may allow borrowers to obtain "A" pricing, but loan processing may still take several days or weeks as it does now.
Third, borrowers with a score below 620 may find themselves locked out of the best loan rates and terms offered by lenders. Mortgage professionals may divert these borrowers to alternate funding sources other than FNMA and FHLMC. Borrowers may find the loan terms and conditions slightly less attractive than the "A" loans, and it may take some time before a suitable funding source is located.
As more lenders utilize credit scoring, the loan approval and closing will be compressed for most consumers. In the future, a high FICO score may be your ticket to a speedy and competitively priced mortgage loan.
Q. What if I am new on my job?
A. A new job can work in your favor when you apply for your loan. Loan program guidelines look for a 2-year job history in the same field, but a job change for a better position is looked upon favorably.
If you are a recent college graduate, you may be able to obtain a loan even though you don't have a 2-year work history.
Q. What does "loan to value" mean?
A. Loan to value (LTV) is the loan amount divided by the lesser of the sales price or appraised value of the property securing the loan. For example, if you are putting 15% down, you would only be borrowing 85% of the total sales price from the lender. Therefore your LTV would be 85%. Q. How do I "lock-in" my interest rate?
A. A Loan Officer can "lock-in" the interest rate quoted, over the telephone during their pre-qualification interview with you. At your request, we will provide you a written Interest Rate and Price Determination Agreement, which details the interest rate and terms of the loan you have requested, as well as the period of time the rate is locked. This may vary between 10 days and 60 days depending upon your projected closing date.
Q. What is an 80/10/10 and an 80/15/5?
A. An 80/10/10 refers to a combination loan with an 80% first lien, a 10% second lien and a 10% down payment. The benefit is that this allows 90% financing without incurring mortgage insurance. The second loan carries a slightly higher rate of interest, compensating the lender for the greater risk of loss in the event of a foreclosure. The borrower benefits from a slightly lower total payment and a greater interest write off at tax time. Similarly, an 80/15/5 is an 80% first lien, a 15% second lien and a 5% down payment.
Q. What is Mortgage Insurance?
A. Mortgage Insurance is paid for by the borrower and protects the lender from loss in the event the borrower defaults resulting in foreclosure. Consumers often misunderstand mortgage insurance and think of it negatively. However MI is a positive thing for borrowers in that it allows lenders to grant loans that they otherwise would not consider due to excessive risk of loss. Depending on credit scores and loan structure, mortgage insurance may be required when the down payment is less than 20%.
Q. What do I need to bring to when I sign my loan documents?
A. Loan document signing generally takes place at the escrow company. However, signing can usually be done anywhere in the presence of a notary public. Each borrower will need to bring a legal form of picture identification. You should also be prepared to bring the required funds to close. The escrow officer will provide you with this figure, which you will need to bring in the form of a cashiers check or arrange a wire transfer from your financial institution. Personal checks and cash are not acceptable.
Q. How much do I need to insure my home for?
A. Your lender can legally require you to maintain hazard insurance on your property to protect their investment. The minimum insurance coverage is generally the total of your combined loan amounts, but may in some instances be the replacement cost of the property, if the replacement cost is less than the loan amounts. In no instance can you be required to insure your home for more than the total loans on the home.
Q. What is the Annual Percentage Rate (APR) on my Truth in Lending Document and what does it mean?
A. APRs are a way to calculate the annual cost of loans, taking into consideration loan origination fees (points) and the other costs associated with securing a loan. The additional costs include appraisal and credit report fees as well as processing and document fees. When a Regulation Z (Reg Z, the lender's disclosure of cost for the loan) is prepared for a buyer/borrower the prepaid interest is also included in the APR calculation. APRs were intended to give consumers a way to check the true cost of a loan. This is rarely the end result however as they fail to take into account many factors necessary to determining the best loan for a borrower. The biggest issue they ignore is the length of time a consumer intends to keep the loan. For example, if you sell or refinance in a short period, the low rate, high closing cost option that had the lowest APR would not be your best option.
Q. How is the APR calculated?
A. One common situation that occurs when a borrower receives a Reg Z, and a copy of their note, is the column that indicates the amount financed is less than the loan amount the borrower is actually financing. It is here that many borrowers leap before they look and call to find out why they are only receiving a $146,925 loan when they applied for a $150,000 loan. It is here that APRs enter the picture. Let's look at how APRs are calculated. For our illustration we will assume a 8.50% fixed rate interest. For a 30-year loan the monthly payments for a $150,000 loan are $1,153.37.
In order to calculate the APR for this loan we subtract $2,250.00 (1.50 points), $275.00 appraisal fee, $50.00 credit report fee, $500.00 processing, document and other fees. ($150,000 - $3,0750 = $146,925). The $146,925 is then used as the present value/loan amount to determine the true cost of this loan. By solving for the new interest rate for a $146,925 loan with the same payment of $1,153.37, the APR is calculated as 8.73%.
How does this compare to a 30 year fixed rate loan with a 8.00% interest rate and 3.50 points? The monthly payments for this loan are $1,100.65. In order to calculate the APR for this loan we subtract $5,255.00 (3.50 points), $275.00 appraisal fee, $50.00 credit report fee, $500.00 processing, document and other fees. ($150,000 - $6,075 = $143,925). The $143,925 is then used as the present value/loan amount to determine the true cost of this loan. By solving for the new interest rate for a $143,925 loan with the payment of $1,100.65 the APR is calculated as 8.44%.
Q. Which loan program is best for me? How do I know?
A. There isn't a single, simple answer to this question. The right type of mortgage for you depends on many different factors: Your current financial picture; How you expect your finances to change; How long you intend to keep your house; And how comfortable you are with your mortgage payment changing from time to time.
For example, a 15-year fixed-rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. And an adjustable rate mortgage may get you started with a lower monthly payment than a fixed-rate mortgage -- but your payments could get higher when the interest rate changes.
The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences frankly with us. Only then will we be able to determine which loan is best for your situation.