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Mortgage Information

Confused by all the different loan programs and financial terms? 

We can help!

Below is some general mortgage information along with a summary of several loan types and definitions of some common terms.

When should I call the mortgage company?
This should be your first step for many reasons:

1.   If you have financing pre-arranged, you are less of a risk to the seller and can often negotiate a better deal.  Many sellers won’t accept an offer unless you are pre-qualified.  Even if they do, you will usually be required to provide a Conditional Loan Approval within 5 days of contract signing.  Ideally, you should get pre-approved, but at a minimum, you should be pre-qualified with a lender you trust before you begin shopping for a home.  (See 'Pre-Qualified vs. Pre-Approved' below.)

2.  You need to know what type of loan you can qualify for prior to finding a property.  This is because some sellers will not accept a contract if the buyer is going to use a VA or FHA loan.  Other sellers will accept the contract but won’t negotiate as much on price.  This is because VA and FHA loans can require the seller to pay for certain items that could otherwise be paid by the buyer.   In other words, a VA or FHA buyer will generally cost the seller more at closing.

3.  Some lenders will not finance certain types of properties at all.   Condominiums, for example, can present several obstacles.  First, to use a VA or FHA loan, the complex must be a VA or FHA approved project.  Some condominiums are even difficult to purchase with a conventional loan.  Lenders determine approval based on many factors such as the percentage of renters vs. owners in the complex.  Also, if one individual owns over a certain percentage of the units in the complex, some lenders will not fund a loan for properties in that complex at all.

4.  You don’t want to look at houses you can’t afford.   Not only is this a waste of your time, but it’s extremely difficult to find a 'Chevrolet' that you like after you’ve been test driving 'Cadillacs'.  In other words, if you can only qualify for $110,000 loan and you’ve already been looking at $150,000 houses, those $110,000 houses suddenly don’t look so great in comparison.

How do I choose a mortgage company?
Like Real Estate Agents, mortgage companies and Loan Officers are a dime a dozen.  Shop around.  Talk to many and go with the one you trust.  Ask friends and relatives if they can recommend somebody.   Don’t be afraid to ask questions.  Do NOT let anybody high-pressure you into signing anything you feel uncomfortable with.
What questions should I ask?
Ask the Loan Officer to explain anything and everything that you do not COMPLETELY understand.  When you first start shopping for a loan, you will hear many terms...VA, FHA, conventional, points, fixed rate, adjustable, balloon, etc.  All of this can be very confusing and people are often hesitant to ask questions because they don’t want to appear stupid.  Buying a house is a huge, long-term investment.  And as the cliche goes, the only stupid question is the one not asked.  As a matter of fact, you should ask questions even if you DO know the answer.  This is a good way to find out if your Loan Officer knows what they are talking about and if they’re being straight with you.  After all, it is your hard-earned money.  Three very important questions to ask are:

1.  Is the loan a fixed-rate or adjustable?

2.  Is there a pre-payment penalty?

3.  What is the Annual Percentage Rate (APR)?  This is not necessarily the same as the "interest rate" you were quoted.

Ideally, you want to find the lowest interest rate with the lowest possible closing fees.  The APR is the best way to compare loan programs because it reflects both the interest rate and other fees as one combined figure.  In other words, it reflects the actual cost of your loan.  BE CAREFUL!  Many lenders will quote a low interest rate and then nail you with other fees (the small print!)  This can easily make your loan more expensive than a program with a higher interest rate.  The lower the APR, the lower the total cost is to you.  Your lender should tell you the APR in addition to the interest rate.  The amount you will have to pay for a loan is closely related to your credit-worthiness.

Also be aware that lenders are required to provide you with a document called a "Good Faith Estimate of Closing Costs."  Although this is only an estimate, it tells you, in writing, the costs and fees you can expect to pay at closing.  It may not include many title company fees, but your Real Estate Agent should be able to help you estimate those costs.    

Pre-Qualified vs. Pre-Approved
One of the first questions your Real Estate Agent will ask is if you’re pre-qualified.  Don't confuse this with loan approval...it is very different.  A pre-qualification is usually given in just a few hours or days.  It is usually based upon only a credit report and what you tell the lender, such as how much you make, how much you owe and what kind of assets you own.  A pre-qualification letter should state all of the conditions that must be met before your loan is actually approved.  You will usually be asked to pay approximately $35 for a tri-merged credit report in order to get pre-qualified.

Pre-Approval, on the other hand, means the lender has already verified your credit history, income, employment, debts, assets and anything else required for you to get the loan.  While pre-approval may take as long as 2-4 weeks, once you have it, you are as good as a CASH buyer.  All that's left to do before closing is to approve the property: appraisal, termite inspection and title work.  Once pre-approved, you could close on a property in as little as 7-10 days.  This makes you very appealing to sellers.  Some sellers will even accept a lower price from a pre-approved buyer because 1.) they have some assurance that your loan will not fall through, and 2.) you can close the deal quickly.

I'm buying a new home and my builder offers their own financing.  Should I use it?
It depends.  You should still investigate other lenders and go with whoever will give you the best overall deal.  Many builders will offer incentives, such as $5000 off, if you use their financing.  Depending on the builder and your Real Estate Agent, you may be able to negotiate this discount AND use your own lender, especially if you are pre-approved.  Don't just go with the builder's financing because they offer you a discount.  As always, you need to look at the overall cost of the loan.
How much will taxes and insurance add to my payment?
The amount of the property taxes depends on many factors, including the property itself, the city where it's located and whether it will be owner-occupied or an investment property.  Your Real Estate Agent should be able to tell you the annual tax amount on any of the properties you're interested in.  If not, give us a call and we can help you find out.  Insurance is also based on many of the same factors.  Your insurance agent should be able to give you a quote on what your premium will be for any given property.  If you use the same insurance agent you use for your other insurance needs (i.e. your car insurance), you will usually receive a lower rate than if you go with a different company.
Types of loans:
VA Guaranteed Loan - If you are a veteran of the U.S. Armed Forces and meet basic requirements, you can qualify for a loan that is guaranteed by the Veterans Administration.  One of the advantages of a VA guaranteed loan is that you don’t need a down payment.  You only need enough money to pay for closing costs.  And unlike other zero down programs, VA loans do not require mortgage insurance.  This helps veterans who otherwise may not qualify.  One of the disadvantages of a VA loan is that you will be required to pay a funding fee of approximately 2-3% of the loan amount to the VA.  However, it can be financed into your loan.  If you are a veteran with a service-connected disability, you do NOT have to pay this fee.

FHA Insured Loan - An FHA loan is a government insured loan.  It is similar to a VA guaranteed loan in many ways, but you do not have to be a veteran to qualify.  FHA offers different programs to help buyers get into homes without large down-payments.  This is often a good way for first-time buyers to go.  Be sure to ask about mortgage insurance.  

Conventional Loan - Conventional Loan - These are non-government loans, usually requiring a substantial down-payment. (10% - 20%).   However, if you can come up with the cash, it may be the way to go.  Ask many questions since you do not have the government stipulations that protect your interest like with VA and FHA loans.

80-20 Loans - This is a special zero down loan program offered by some institutions.  You borrow 80% of the purchase price as a normal first mortgage.  The other 20% (your down-payment) is borrowed as a second mortgage and therefore, has a much higher interest rate.  However, since you are considered to be putting 20% down, you will usually not be required to pay mortgage insurance with this type of loan.  This can often be worth paying the higher interest rate, especially since mortgage interest is generally tax-deductible whereas mortgage insurance premiums are not.  It is worth checking out if you don't have much money for a down-payment.

Fixed Rate - This means the interest rate will not change for the life of the loan (i.e. 7.5% for 30 years).  Fixed rate loans are great for people who are on a fixed income or anyone who wants to know that their payment will not change over time.  A fixed rate loan is a good choice when interest rates are low.

Adjustable Rate Mortgage (ARM) - These are loans with interest rates that fluctuate.  The interest rate is usually fixed for a certain number of years and then adjusts (usually annually) based on certain market conditions.  For example, a 3/1 ARM will have a fixed rate for three years, after which the rate will adjust each year for the remainder of the loan.  There is usually a 'cap' or limit on how much the interest rate can increase per year and over the life of the loan.  ARMs are often attractive since they offer much lower rates than fixed rate mortgages.  However, it is important to realize that this is only the starting rate!  This type of loan is good for people who know they will only own their house for a few years.

Balloon Loan - This type of loan has a fixed rate for a set period of time with one large or "balloon" payment at the end.  Most of these loans can be refinanced so long as certain conditions are met.  A balloon loan may be right for people who have the money to pay cash but want to keep their cash and be able to use it for a period of time.

Some other terms you should know:
Mortgage Insurance - This is insurance that can be required on high-risk loans (usually those with less than a 20% down-payment).  The premium may be a one time fee due at closing, or it may be added to your monthly payment, or both.

Points - A point is 1% of the loan amount and is paid to lower the interest rate of the loan.  (Two points on a $100,000 loan is $2000).  This is cash you will have to pay as part of your closing costs.  With interest rates as low as they are today, most borrowers do not need to pay any points to get a decent rate.  The longer you plan to stay in your home, the more advantageous it is to lower your interest rate.  If you plan to move in a couple of years, it would most likely NOT be in your interest to pay points for a lower rate.

Qualifying Ratio - Depending on the type of loan, lenders will require that your mortgage payment not exceed a certain percentage of your income.  This keeps the lender from making loans that will over-extend the borrower and result in a foreclosure.

Pre-Payment Penalty - This is a penalty imposed on the borrower for paying a loan off early.

Origination fee - This is the fee charged for 'originating' your loan.  Most lenders charge 1% of the loan amount, but in many cases, it is negotiable.  Some lenders charge no origination fee.  But rest assured, they probably make up for it elsewhere!


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