10 MOST FREQUENTLY ASKED
QUESTIONS
- When should I lock in? Should I lock in?
This is a very difficult decision. This is up to
the borrower to decide when and if to lock. The rates are subject to change
throughout each business day.
- How do I reduce the amount of my closing costs?
Many closing costs such as
appraisals and title company fees are determined by the companies that provide
these services. Some fees such as title policy costs are set by state
governments. Discount points can be reduced by going with a higher interest
rate which may have some tax advantages for the borrower.
- What is PMI?
PMI is insurance for the benefit of the lender. You pay,
they benefit. If the property is abandoned or goes into foreclosure, this
policy protects some of the value of the home. This policy is usually required
if the LTV is greater than 80% on purchases. There are loans for 100% of the
purchase price that do not require PMI, and some loans at 75% LTV do require
PMI. Self insured loans are available. Consult your Federated Lending
Corporation loan representative.
- Why do I have to establish an escrow account?
Although many lenders require an
escrow account for real estate taxes and insurance, there are also exceptions.
An escrow account can be avoided (waived) if the loan amount is not more than
80% of the value of your home. If you bought the home within the last year,
then use the sales price or the appraised value -- whichever is lower. There is
a fee which is charged by the lender for the waiver of escrow.
- Can my loan be sold?
Yes, and most loans are sold on the secondary market. In
some cases the borrower is not aware of the sale because the servicer of the
loan remains unchanged. The sale does not affect the terms of your note.
- What can I do if I don't think I have enough cash?
An Innovative Mortgage Solutions
representative can help guide you to the most prudent use of resources. An
example of a typical question is whether to pay off credit cards or to save the
cash to be verified as cash reserves. Since there are many aspects to each
person's financial situation, not all decisions can be categorized and
displayed in a table.
- What is APR (annual percentage rate)?
We are required by federal law to express the cost
of credit as an annual rate.
- How is the equity in my home determined?
Equity is the difference between the amount owed
on a home and its market value. Market value is established by a licensed
appraiser.
- What is the difference between "closing" and
"escrow"?
In some states, the consummation of
a real estate transaction is called "escrow." In other states this same process
is called "closing." Both terms mean that all funds are safeguarded (escrowed)
by a reliable third party. This third party can be an escrow agent, title
company, or an attorney. When all documents and funds are received, escrow is
closed and funds are dispersed and title is transferred and recorded.
FOR YOUR
INFORMATION
- What is the difference between a Mortgage Company
and a Bank?
At Innovative Mortgage Solutions,
we specialize in Home Mortgage products no savings accounts, CD's, safe
deposit boxes, checking accounts, etc. As specialists, we can offer better loan
products at better prices than banks. We also offer many different programs
that can be custom-tailored to the individual borrower. We have a multi-lender
platform, in that if we don't have the best product for you, and one of our
partners or investors does, we can offer their programs at no additional cost
to you. Banks generally offer their own programs that are set up for the
average buyer, if you don't qualify or if their program isn't the best for you
- they can't help you.
- When should I refinance?
People refinance for many reasons. The old adage of
refinance when you can lower your rate 2% or more is not always true. There are
too many factors to consider and your Loan offer can provide a free analysis to
determine whether a refinance makes financial sense.
Rate
Reduction
Generally, if your closing expenses can be recovered within
the first 30 months of the new loan, refinancing is probably a good idea.
Mortgage Consolidation
If you are carrying a first and second
mortgage on your home, and want to combine the two loans at a favorable
rate.
Loan Term Reduction
If you want to reduce the length of
your loan from 30 to 15 years because you can afford the slightly higher
payments of a 15-year term, you may wish to switch to take advantage of the
shorter term's fast equity buildup and significantly reduced interest costs.
Because the 15-year rate is about .275% to .5% less than the going 30-year
rate, and because the loan principal is paid off in half the time, this is a
highly cost-effective loan program.
Tax-free Cash Via Equity
Many
borrowers have built up significant home equity over the years through
appreciation and principal reduction. These borrowers may refinance an existing
mortgage to a larger loan amount, with the additional funds used for any
purpose - investment, car, tuition, debt consolidation, etc. And, unlike any
other consumer loan, the interest paid on the "cash out" could be 100% tax
deductible! (Consult your tax advisor.)
Switch From Adjustable to a
Fixed, or to a New ARM
You may have an adjustable rate mortgage
(ARM) you're not entirely satisfied with. Maybe the rate is higher than you
like, or the potential for rate increases looms ahead. If you plan on staying
in your home at least five years, now might be an excellent time to switch to
the payment security of a fixed-rate loan. Or, if you plan on moving in less
than three years, consider refinancing to a new ARM to take advantage of the
low starting rates that may be available. Even if the new ARM's rate rises at
the first adjustment interval, the starting rate may be low enough to offset
any increased payment costs.
Balloon Payment Due
If you have a
balloon mortgage with a lump sum payment due in the near future, (or a 5/25,
7/23, 3/1, 5/1, or 7/1 combination mortgage) consider refinancing if you are
comfortable with the current rate environment.
What are the different loan types?
- Fixed Rate
Mortgages
Rates are fixed for the life of the loan and are available
for various amortization periods: 15 years; 20 years; 30 years.
- Adjustable
Rate Mortgages
1 month COFI ARM: rate adjusts monthly after a 3 month
intro period
6 month ARM: rate adjusts each six months
1 year ARM: rate
adjusts each year
3/1 ARM: rate fixed for 3 years, then adjusts
annually
5/1 ARM: rate fixed for 5 years, then adjusts annually
7/1 ARM:
rate fixed for 7 years, then adjusts annually
Two-Steps
5/25:
rates adjust once at end of first 5 years then remain fixed for 25 years
7/23: rates adjust once at end of first 7 years then remain fixed for 23
years
Balloons
5/25 or 7/23: rate is fixed for first 5 or 7
years. There is a conditional refinance (approximate cost $275) at the end of
the initial 5 or 7 year period.
Variations on These Loans
Rates
can be bought up or down. Buying the rate down can be permanent or temporary.
CLOSING COSTS AND CASH
RESERVES
What is the difference between closing costs and
the cash reserves needed to close a transaction?
- The closing
costs are less than the total verified funds needed. Closing costs include
points, real estate taxes, insurance premiums, survey costs, title policy
costs, and several other lesser fees. Verified funds would include the closing
costs plus several months of PITI. Reserves are additional funds required by
various programs.
What does cash out mean?
- In some
circumstances a borrower may receive a new mortgage which 1)pays off the
previous mortgage and 2)provides the borrower with additional cash pulled from
the equity of the home.
What are "closing costs"?
- The closing or
the close of escrow is the last stage of the transaction of title of refinance.
In most states the closing is administered by an independent, reliable third
party and fees are paid for this service. Closing costs are non-recurring fees
associated with the creation of a mortgage.
I need $12,300 for closing. I have $6,000 and my
wife's mother will loan me the other $6,300 at no interest for 4 years. Do I
need to document that transaction?
- A gift from a
parent, or other immediate family member is an acceptable form of down payment
in most cases. A loan is only acceptable if there is collateral for the note
other than the subject property. A personal loan is not an acceptable form of
down payment. A gift is OK, usually. The borrower must have at least 5% of
their own funds unless the gift represents 20% or more of the purchase price.
Be honest with your Federated Lending Corporation mortgage representative.
My cash for closing is in a safety deposit box. Is
that a problem?
- Yes. Although it
may appear to be strange, cash is not an acceptable form of funds to close when
a loan from a financial institution is also needed. However, there are several
loan programs that allow cash with no paper trail. These programs usually
require a down payment of at least 30% of the purchase price and usually
command a higher interest rate.
The house appraises for $245,000 and I have a
contract to purchase it for $198,000. Can I get a loan for 95% of the appraised
value?
- Loans from
financial institutions and many private investors will base the loan amount on
a percentage of the contract price or the appraised value, whichever is lower.
If you bought it for $198,000 then it is worth $198,000. Some equity lines of
credit are based on appraised value.
CREDIT
What is PERFECT CREDIT?
- a record of
paying your mortgage(s)/ rents on time
- a record or
paying all financial obligations on time for many years
- there should be
only a few credit inquiries
- there should be
no bankruptcies or tax liens
- there should be
several long-established credit accounts in the USA
- no active
lawsuits
What is GOOD CREDIT?
- a record of
paying your mortgage(s)/ rents on time
- reasonable
explanations for occasional late payments on installment and credit accounts
- there should be
only a few credit inquiries
- bankruptcies or
tax liens that are satisfied or paid
- reestablished
credit accounts with a satisfactory payments record
- no active
lawsuits
My CREDIT IS NOT GOOD. What difficulties should I
expect?
- on a purchase,
the down payment may need to be increased
- the interest
rate may be higher (higher perceived risk)
- sometimes a
second (junior) mortgage will help, especially if the LTV is lower due to the
perception of a higher risk. This second mortgage is another loan against the
house, but second in priority behind the primary or first mortgage. It could be
offered by the seller, per program guidelines.
Should I pay off all of my credit cards before I
apply for a mortgage?
- Maybe not. Ask
your Federated Lending Corporation mortgage representative.
My credit is perfect, but my spouse's credit is
bad. Can we use my credit only?
- Yes if we use
your income only. Be honest with your Federated Lending Corporation mortgage
representative as they can help you make this decision.
INCOME
Last year I made $75,000: $25,000 as a base salary
and $50,000 in bonus and commissions. This year so far, I have made $60,000 in
commissions. How will an underwriter evaluate my income?
- If your bonus or
commission is 25% or more of your total compensation, the underwriter will ask
for the last two years' tax returns. Your income will be very close to the
Adjusted Gross Income on line 31 of page 1 of the tax return.
- If you own 25%
or more of the company - whether or not you get a W2 - then you are considered
self-employed and your income is verified by line 31, page 1 of the IRS form
1040, or line 16 of 1040A, or line 4 or 1040EZ.
AND OTHER QUESTIONS WE'VE
HEARD
What information will I need to submit with my
application?
- W-2 (2 years)
and current month paystubs
- Employment
Addresses (last 2 years)
- Latest 3 months
statements (All accounts,bank,investment, 401K,IRA,Credit Union)
- Real Estate
owned addresses, balance, monthly payments
- 2 years tax
returns if Self Employed or MORE than 25% of your
income is commission, overtime or bonus
- Open loans
balances ,monthly payments, acct numbers, addresses
- 12 months rental
history (canceled checks)
- Agreement of
Sale
What is title insurance?
- Title insurance
protects the lender against loss due to problems or defects related to the
title on the property being mortgaged. These problems would typically involve
ownership claims against the property which were not identified by the title
search. It is paid for with a one-time premium at the time of settlement.
What is a flood certification/flood insurance?
- A flood
certification will identify a specific property as being within or not within a
flood hazard area as defined by FEMA, a federal government agency. If the
property is within a flood zone, you will be required to carry flood insurance,
protecting you and the lender from loss due to flood damage.
How large a downpayment will I need?
- In most loan
programs, at least a portion of the down payment must come from your own funds.
This demonstrates to the lender that your home is an investment that is
important to you. For example, if the loan program you select requires a 5%
down payment, and the purchase price on your home is $100,000, your down
payment will be $5,000. However, you may only have to provide a 3% down payment
from your own funds, totaling $3,000. The remaining 2%, or $2,000, can be a
gift or grant. Some peolpe contribute to their down payment by borrowing
against the equity in their profit-sharing or 401(k) plans.
- Federal Housing
Administration (FHA) loans are an exception since the entire down payment may
be a gift, and the Department of Veterans Affairs (VA) loans require no down
payment for qualified members and veterans of the armed forces or their widows.
Does my credit have to be perfect?
- Your ability to
purchase a home will depend, in part, on your credit history as profiled in a
"credit report". The information on the credit report is used to determine how
responsible you are in meeting your obligations. You do not have to have
perfect credit to be approved for a mortgage, but if you have a number of late
payments, you will need to provide a letter explaining why those payments were
late. It is useful to check your credit standing several months before you
apply for a home loan. When you think you are ready to purchase, your mortgage
loan officer will help you complete the form authorizing them to obtain your
credit report for you. Getting Your Application Approved is an article that
will help you understand what lenders look for when approving a mortgage
application.
How do I make an offer?
- Once you have
found the house you want and can afford, be sure to determine the home's true
value by comparing it's price to that of other houses in the same neighborhood.
Your Realtor can help you with this, or you might want to hire an independent
appraiser to help guide you.
- Once you and the
seller have reached an agreement on the price of the home, you may be asked for
a deposit or binder to hold the house while the purchase contract is being
prepared.
Which kind of mortgage should I apply for?
- Once you're
ready to buy a home, you need a mortgage that fits your budget and your
financial objectives. Some people prefer the predictability of a fixed rate
mortgage. Others need low initial monthly payments that adjustable-rate
mortgages offer so they can afford more house for the money. Still others like
the idea of paying off the mortgage sooner and saving thousands of dollars in
interest and thus, opt for a shorter term.
- Selecting the
best mortgage loan for your needs can be confusing. It is best to consult with
a mortgage loan officer prior to selecting a loan program. A loan officer can
discuss your financial goals, income and expenses and help you determine the
appropriate home financing option based on your needs.
What is PITI?
- Mortgage lenders
use this term over and over again, so it is important that you understand what
it means. "PITI" is the total monthly payments you will make each month to your
lender and includes principal and interest on the mortgage, real estate taxes,
and homowners insurance. If you will be paying private mortgage insurance or
condo/co-op association fees, these monthly payments are also included in the
"PITI" amount.
What is a qualifying ratio?
- A "qualifying
ratio" is a formula used to determine your maximum PITI payment and mortgage
amount and the purchase price of the home you can be approved to buy. It is
important to remember that ratios may be stretched to a slightly higher amount
depending upon your loan product and your other financial circumstances,
referred to by some lenders as "compensating factors". Each loan product has a
different qualifying ratio. There are two parts to each ratio: the front and
the back.
- Front Ratio: For
example, the front qualifying ratio on a Federal Housing Administration (FHA)
loan is 29%. (If only one number is listed, as with Department of Veteran
Affairs (VA) loans only the back ratio is used to qualify.) This means that to
qualify for an FHA loan, your total monthly housing payment (PITI) should not
exceed 29% of your total gross (before taxes are taken out) monthly household
income.
- Back Ratio: The
back qualifying ratio on the FHA loan is 41%. This means that to qualify for an
FHA loan, your total monthly housing payment (PITI) and all other debts should
not exceed 41% of your total gross (before taxes are taken out) monthly
household income.
What are closing costs?
- Closing costs
cover all the charges associated with the transaction, including points,
origination fee, appraisal fee, title search fee, title insurance, survey,
taxes, deed recording fee, charges for credit reports, etc. Closing costs range
between two and six percent of the mortgage amount, depending upon the loan
product and fees that are customary in your region.
What happens at the closing?
- Before closing,
you may need to arrange for a home inspection, choose a settlement service or
attorney, make arrangements with the utility company, and obtain hazard and (if
necessary) mortgage insurance. Your loan officer can be a big help in assisting
you with these details.
- At closing (ah,
the final step) your mortgage is signed and sealed, and your check is
delivered. Your first mortgage payment will usually be due approximately 30
days after closing. Now you can settle into your new home.
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