What are my options if I have no down payment, or only a small down payment?
FHA loans allow a minimum of 3.5% down and this down payment can be in the form of documented gift funds from a family member. Conventional loans may allow a minimum of 3% down, which can also be from documented gift funds from a family member. Using VA financing a qualified active service or veteran may receive 100% financing. The USDA Rural Housing program also allows 100% financing, though there are both geographic and income restrictions with this program. The amount financed may be reduced on all of these programs depending on the borrower(s) qualifying credit score.
What is private mortgage insurance (PMI)? Do I have to pay it?
Private mortgage insurance is required, on Conventional mortgage loans, when a borrower puts less than 20% down. This insurance protects the lender if a borrower defaults on their loan and pays the deficiency. The cost of the private mortgage premium is included in your monthly payment and is based on the amount of the down payment, the qualifying credit scores and other factors.
What kinds of government loans are available to buyers?
HUD (US Department of Housing and Urban Development) is committed to increasing home ownership for minorities and low-income Americans. It oversees the FHA (Federal Housing Commission, offering a variety of programs, including 203(K) loans to purchase a home that needs fixing up, financing for FHA-insured homes that have been acquired through foreclosure, and other FHA-insured loans. HUD has many programs to help in housing needs.
FHA loans (offered by the Federal Housing Commission) are the most popular. They don’t actually make the loan; they guarantee loans requiring only a 3.5% down payment, and they do not have as strict credit policies as many conventional loans.
VA (Veteran’s Administration) loans are really guarantees for loans obtained by certain qualified veterans or other qualifying home buyers or refinancers such as unmarried surviving spouses.
What is the difference between a fixed rate mortgage (FRM) and an adjustable rate mortgage (ARM)?
A fixed rate mortgage has a set interest rate for the life of the loan. An adjustable rate mortgage has a specified adjusting period where the rate can be adjusted along with the payment.
What is included in closing costs?
Closing costs will be about 3%-6% of your mortgage loan and commonly include:
Generally paid with application:
- Application Fee: a generally non-refundable fee to process the loan information
- Appraisal Fee: fee for an independent appraisal of the house (required by the lender) to establish market value to factor into the determination of the loan amount
- Credit Report Fee: a fee for the lender to obtain your credit report from one of the three recognized credit reporting bureaus (Equifax, TransUnion, and Experian). This report gives your credit history and a credit score which is used to determine qualifications and loan limits.
Generally paid at closing:
- Survey Fee: (may be required) a survey to verify property boundaries
Flood Certification Fee: (may be required) a minimal fee to verify that the property is not in a flood zone
Title Search Fee: a fee to obtain a history of the property to establish if there are any legal claims on the property
- Title Insurance: a lender’s title insurance policy is required to protect the lender in getting the balance of the loan repaid; an owner’s title insurance is also optional, protecting the buyer’s investment
- Attorney Costs: paid for review of all documents needed to close your loan
Recording and transfer charges: a small fee to record the purchase of your home
- Origination points: a percentage-of-the-loan amount charged as a fee for the lender’s preparation of the loan
- Discount points: an optional percentage-of-the-loan amount paid to obtain a lower interest rate
- Escrow Accounts: (generally required) escrows for future fees that will be due related to the house, such as: Private Mortgage Insurance (required for loans financed at over 80% of value), Homeowner’s Insurance (often called “Hazard” or “Fire Insurance”), property taxes, and sometimes, interest.
Is there any way to speed up the loan approval process?
- Becoming either pre-qualified (a preliminary analysis of your debt-to-income ratio), pre-approved (NOT a loan guarantee-but analysis of credit report and income and a correlating maximum loan amount and interest options), or obtaining a loan commitment (guaranteed under pre-set conditions) will help speed up the loan process. Pre-qualifications indicate that you are a more solid buyer. However, only a loan commitment is a guarantee that you will get the loan.
- Another way to help speed up the loan approval process is to get your paperwork ready in advance.
- Check your credit score and clean up any old items. Have explanations for any remaining questions on your credit report.
- Gather any needed documentation such as personal identification, income verification and tax returns, employment history, and insurance commitments.
- And, most important, when the loan officer asks for any information, always respond promptly.
What is the difference between a mortgage broker, a lender, and a loan officer?
A mortgage broker covers a broad basis, linking buyers with appropriate lenders, counseling borrowers, and even processing loans.
A lender is the institution or agency that will actually loan the money.
A loan officer is an employee of either a lender or a mortgage broker, generally finding borrowers, counseling, taking applications, and often, being involved in the loan processing.
What documents will be required to close a loan?
Documents required vary from loan to loan, but generally the following are required, often for up to two years back:
- statements of income such as W-2’s, pay stubs, financial statements
- bank statements
- a list of any assets that you own
- rental or mortgage history
- employment history and current information
- personal identification, including Green Card if applicable
- purchase contract
- Other pertinent items such as: Bankruptcy Discharge Notice or Divorce Decree
- loan application
Is it more expensive to rent or to own?
Owning a home is often considered the better deal, but keep these considerations in mind:
- many home buyers do not build any equity in the first few years-the bank takes it all in interest-and many move before they begin building equity
- purchasers costs often increase due to mortgage interest adjustments, payment adjustments, increased property taxes, insurance premium increases, and maintenance costs
- the tax break for owning a home only kicks in if the deductible expenses (such as interest) are higher than the standard deduction
- there are other reasons that may make renting a better option:
- Many maintenance and repair costs belong to landlord
- Easier relocation for job opportunities without having the cost and hassle of reselling your home
- Often, more convenient access to transportation, employment, retail entertainment, and other common facilities
Why do I need to check my credit prior to buying a house?
The lender will obtain a credit report. If you look at it prior to a loan application, you have a chance to clean up detrimental items before you have to explain them to the lender. Also, if your score is low, you can do specific things to increase your score such as paying down debt, increasing cash in the bank, and making payments consistently on time, over a period of time.
What is the difference between conforming and non-conforming loans?
Conforming loans are mortgage loans that meet specific, uniform national standards (most commonly referred to as Fannie Mae and Freddie Mac requirements) that deal with document specs, debt-to-income ratio limits, maximum loan amounts, and interest rates.
Non-conforming loans are loans that do not meet banking qualifications generally due to borrower’s financial status or property that does not meet required criteria. These types of loans are funded by private money and usually have a much higher interest rate than conforming loans. Loans that exceed Fannie Mae limits are called “Jumbo” loans.
Where do the names Fannie Mae and Freddie Mac (loan regulating entities) originate?
The Fannie Mae entity was created in 1938 under President Franklin D. Roosevelt to help the home buying economy which was floundering at that time. In 1968, Freddie Mac was chartered to provide competition. These are not government funded entities, only government sponsored, with the idea of creating national standards and guidelines to ensure a long-term healthy housing market.
They operate by borrowing foreign, low-interest money that, in turn, allows them to provide local banks with money to offer affordable housing loans. Together these two entities control about 90% of the secondary mortgage market.
They were dubbed these names from the acronyms of their respective government sponsored entities:
- Federal National Mortgage Association (FNMA): Fannie Mae
- Federal Home Loan Mortgage Corporation (FHLMC): Freddie Mac
What are points?
Points are a fee that is expressed as a percentage of the loan amount: one point is 1% of the loan amount.
Origination points are charged as a fee for some of the costs of the loan processing.
Discount points are basically a prepaid interest, or a fee to reduce the interest rate, known as a rate “buy down.”