FREQUENTLY ASKED QUESTIONS
Here are questions people may ask when buying a home.
1. Am I better off renting or buying a home?
The decision to rent or buy a home differs for everyone, as there are benefits to both. Buying a home could be a better deal for you depending on how long you plan to live in your home and the loan you choose. Try our Rent vs. Buy Calculator to help you decide which option is best for you.
2. What are the advantages of a home purchase?
A home purchase gives you personal benefits such as a sense of investing in your community and pride for achieving the dream of homeownership. There are some strong financial benefits as well, especially the tax savings you may enjoy. Interest payments on a mortgage are typically tax deductible (consult your tax advisor for more information). As you continue to make mortgage payments, you'll build home equity, as opposed to paying rent to someone else.
1. How much can I afford to borrow?
Everyone's financial situation differs; it is important to recognize what you can comfortably afford to borrow. In general, the loan amount you can afford depends on four factors:
- Your debt-to-income ratio, which is your total monthly payments as a percentage of your gross monthly income
- The amount of cash you have available for a down payment and closing costs
- Your credit history
- The value of the property you are purchasing
For a better understanding of how much you can afford to borrow, use our Affordability Calculator.
2. How much do I need for a down payment?
Your down payment requirements will depend on your lender, the type of home loan you choose and the type of property you are buying. Your required down payment can range anywhere from 3%-20% of the home's purchase price. Lenders offer a variety of different loan programs, including low down payment options. Each loan programs has different rules regarding the down payment required. Down payments can also vary by the amount you want to borrow, as well as factors like credit history.
1. What is the difference between a fixed-rate mortgage and an adjustable-rate mortgage?
An ARM is a loan that starts off with a low fixed interest rate for an initial period of time (anywhere from 1-10 years), and then the rate adjusts periodically to reflect changes in market interest rates. As a result, your monthly payment could either go up or down depending on interest rates when your loan adjusts. With a fixed-rate mortgage, the interest rate remains the same throughout the life of the loan, and your monthly principal and interest payments won't change. As a tradeoff for the security of knowing that your monthly payment won't increase, fixed-rate mortgages typically have a slightly higher initial interest rate than adjustable-rate mortgages. Homeowners who plan to remain in their homes for a longer time or prefer steady rates and monthly payments may prefer a fixed rate. One of our mortgage bankers can help you compare mortgages and choose one that works with your individual goals.
2. What is a conforming loan?
A conforming loan is a mortgage whose amount is under the maximum amount for loans that the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are legally allowed to buy.
3. What is an FHA loan?
An FHA loan is a loan insured by the Federal Housing Administration (FHA). The FHA is a division of the U.S. Department of Housing and Urban Development (HUD) that insures residential mortgage loans made by private lenders and sets standards for underwriting mortgage loans.
4. Do you have low out-of-pocket cost options?
With the wide variety of loan programs available today, there are many home finance options. With a minimal out-of-pocket cost loan, you'll see immediate reductions in your payments, and you won't have to sacrifice your savings or equity to get a great rate. Closing costs on these loans may be added to the principal balance or reflected in a higher interest rate.
1. What is the difference between prequalification and preapproval?
To get prequalified, you will need to provide the lender with some financial information such as your income and the amount of savings and investments you have. The lender will use this information to estimate how much money we may be able to lend you and therefore the price range of homes you can start looking at. To get prequalified the lender will request a formal credit check. The estimate of the loan amount provided to you does not guarantee you will ultimately be approved for that amount.
To get preapproved, however, you will need to provide the lender with financial documents including W-2 statements, paycheck stubs and bank account statements. The lender will use these documents to verify your financial status and request a formal credit check. A preapproval will help you when shopping for homes because sellers will have more confidence that you will be able to obtain a loan to purchase their house.
For both prequalification and preapproval, final approval will also depend on the property purchased.
2. How long will it take to get prequalified?
Prequalification can be a very quick process. It can take as little as 5 minutes. The lender will ask for your income, assets, employment and property information and obtain a credit report.
3. Should I get prequalified or preapproved before finding a home?
You don't have to apply for a loan before looking for a property. It is, however, a good idea to get prequalified or preapproved before you find a home; many real estate agents will take your offer more seriously if you've been preapproved. Also by going through this process, you'll have a better idea of the price range of homes that you might be able to afford.
1. How long does the mortgage process take?
The time needed to complete the mortgage process varies by customer and lender because it includes gathering information from a customer, verifying that information and processing the actual loan.
2. What documents do I need to apply for a mortgage?
3. What is a Loan Estimate?
A Loan Estimate is a written estimate of costs the borrower will have to pay at closing, provided by a lender shortly after your apply for your loan.
4. What is LTV (loan-to-value)?
To qualify for a loan, lenders will look at your loan-to-value (LTV) ratio. LTV is a ratio, expressed as a percentage, of the requested amount of your home loan divided by the purchase price or appraised value of your home. For example, if the home you are purchasing or refinancing has been appraised at $200,000 and you are requesting a loan for $100,000, the LTV is 50% ($100,000 / $200,000).
5. Why is my credit score important?
Your credit score is a way of measuring how likely you are to pay (or not pay) your bills. It's just one of the key factors that the lender looks at when deciding if we will approve your loan application and for what amount and at what interest rate. The higher your credit score, the better your chances of approval at a favorable interest rate. You should discuss your individual credit situation with your mortgage banker. In addition, you can obtain a free copy of your credit report once a year from each of the three major credit reporting agencies - Equifax, Experian, and TransUnion - by visiting www.annualcreditreport.com. You may also obtain a credit score from the agency for a small fee at any time, and your lender will provide your score when you apply for your loan.
6. Will my credit history prevent me from getting a mortgage?
A mortgage banker can explain how your credit score and credit history affect your ability to get credit and discuss available financing options.
1. What does it mean to lock my rate?
A rate lock is when a lender guarantees an interest rate for a set period of time, usually between loan application and closing. During this period, typically 15-90 days, you're protected against rate fluctuations. Lenders have to pay to "reserve" your rate, so the longer your lock-in period, the higher your cost. A mortgage banker can answer your additional questions about rate locks.
2. What is the difference between "locking" and "floating" a rate?
In order to protect themselves against a potential increase in interest rates, many borrowers ask their lender to lock in the rate they have been quoted for a specific period of time, usually 30-60 days. Other borrowers prefer to take the chance that rates will decrease while the loan is processed and let the rate on their loan "float." The rate can then be locked in at any time until just before your loan closes.
1. What is an appraisal and why do I need it?
An appraisal is a written estimate of a property's current market value, based on recent sales information for similar properties, the current condition of the property and the neighborhood. An appraisal is required because it provides written proof of your home's actual value which is used to determine the loan amount you can receive. Your lender will order your appraisal, but a third-party company will perform the appraisal. There will be a fee associated with your appraisal paid to the appraisal company.
2. Do I need a home inspection?
Although a homeowner's inspection may not be required by a lender for your home purchase, it is highly recommended before purchasing a house to help verify the value and condition of the property.
1. What happens at closing?
Closing is the point when your mortgage or deed of trust will be given to the new lender. At your closing, a closing agent will meet with you at a location convenient to you to review and sign the necessary paperwork to finalize your loan. In some states (called escrow states), the closing takes place over a period of time. A neutral third party holds money and/or documents until the escrow instructions are fulfilled. The party can be a title company or an attorney, depending on state regulations.
2. What are the various costs required at closing?
Closing costs can be divided into two main categories: items controlled by the lender and items controlled by third-parties out of the lender's control. The sum of these items is what you will be required to pay for at closing.
- Lender fees include any costs associated with processing your loan such prepaid interest for the extra days in addition to a full month before the first payment is due, discount points, origination charge and any rate lock fees.
- Third-party fees include fees paid for services performed by parties other than the lender, established by the state or local government or set by the individual vendors that provide the service. They also include pre-payments for taxes and insurance that are placed in an impound or "escrow" account. Some examples of third-party fees are appraisal fees, title service fees and government recording fees.
3. What homeowners insurance requirements will I need to meet at closing?
At the time of closing, lenders require you to show that you have adequate insurance in place. For example, if you're purchasing a home, your lender may require insurance that is valid for one year and covers at least 80% of the replacement value of your home. Although lender rules vary, you may want to consider purchasing full replacement costs insurance even if the lender doesn't require it, to make sure that you can repair or rebuild your home after a fire or other loss.
4. What is an escrow or impound account?
An escrow account is typically established at the time of your closing. An escrow account is held by the lender and contains funds collected as part of mortgage payments for annual expenses such as taxes and insurance.
- 1. What is the difference between APR and interest rate?
- 2. What are points and when should I pay them?
- 3. How can I compare loan offers when shopping for a mortgage?
- 4. What is an index and how does it impact my rate?
- 5. What are closing costs?
- 6. What are third-party fees?
- 7. What is an origination fee?
- 8. What is prepaid interest?
1. What is the difference between APR and interest rate?
It is important to understand the difference between your interest rate and APR.
Your interest rate is the direct charge for borrowing money.
The APR, however, reflects the cost of your mortgage as a yearly rate and includes the interest rate, origination charge, discount points, and other costs such as lender fees, processing costs, documentation fees, prepaid mortgage interest and upfront and monthly mortgage insurance premium. When comparing loans across different lenders, it is best to use the quoted APRs for the same type and term of loan.
2. What are points and when should I pay them?
Paying points is a way to reduce your interest rate when you purchase or refinance your home. In essence, you pay up-front for a lower interest rate, reducing your monthly payments. One point is equivalent to 1% of your loan amount; one point on a $100,000 loan amount is equal to $1,000.
3. How can I compare loan offers when shopping for a mortgage?
If you are comparing loans across lenders, be sure to look at all costs, not just the interest rate. The annual percentage rate (APR) tells you the estimated cost of your loan, which includes the interest rate and other upfront fees that you pay for the loan (such as discount points and origination fees). The APR is based on the assumption that you'll keep the loan for its entire term, so you should only use it to compare loans of the same type and length. Estimate your monthly mortgage payment now
4. What is an index and how does it impact my rate?
An index is a published rate used by lenders to calculate interest adjustments on ARMs (Index + Margin = Interest Rate). Some indexes may adjust more frequently than others. Common indexes used are LIBOR (London Interbank Offered Rate), Treasury rates, and the prime rate.
5. What are closing costs?
Closing costs are fees incurred in a real estate or mortgage transaction and paid by borrower and/or seller during a mortgage closing. These typically include a loan origination fee, discount points, attorney's fees, title insurance, appraisal, survey and any items that must be prepaid, such as taxes and insurance escrow payments. Your lender will give you a copy of your Loan Estimate that outlines all the closing costs associated with your loan soon after you apply.
6. What are third-party fees?
Third-party fees are costs associated with your mortgage that go to a third-party for services. Lenders typically have no control over most of these fees. Third-party fees include, but are not limited to, credit report fees, hazard insurance, appraisal fees and title company search fees.
7. What is an origination fee?
An origination fee is a fee a lender charges to process a mortgage, usually expressed as a percentage of the loan which pays for the work in evaluating and processing the loan.
8. What is prepaid interest?
Prepaid interest is a cost charged to a borrower at closing to cover interest on the loan for the extra days in addition to a full month before the first payment is due.
1. What is PMI and why do I need it?
PMI is private mortgage insurance, which you'll need to pay for if your down payment is less than 20% of the purchase price or if the loan has more than an 80% loan-to-value (LTV) ratio. Even if you're refinancing, you'll need to pay PMI as long as your LTV remains above 80%.
2. What is the difference between mortgage insurance and homeowners insurance?
Homeowners insurance is an insurance policy you have on your property, which protects you and the lender against accidents and loss of property or its contents. Mortgage insurance, on the other hand, protects the lender against losses due to default of a mortgage.
3. How much does mortgage insurance cost?
Mortgage insurance costs are based on loan-to-value (LTV) and credit profile and can vary across lenders.
4. What is title insurance and why do I need it?
Title insurance is insurance that protects the lender or buyer against loss from defects that might exist in the title to a property. In order to protect your loan "investment", a lender will typically require the seller to pay for "lender's coverage" title insurance. You can choose "owner's coverage" to protect your investment in the title of your property.