Resources to help you conquer your purchase
Home buying doesn’t have to be intimidating. Use these helpful answers, definitions and tips to give you confidence from application to closing.
Frequently Asked Questions
Q: Do I need great credit to get a mortgage?
A: No, you don’t have to have great credit to qualify for a mortgage, but having a good credit score comes with several advantages. More favorable credit will give you better flexibility in the types of mortgages you can choose, can possibly lower your mortgage payment and qualify you for a lower down payment.
Q: How much of a down payment will I need?
A: You may be able to qualify for a mortgage with as little as 3% down. However, there are good reasons for more putting more money down on a home. First, a larger down payment means that you will finance less, meaning that you are paying less interest. Mortgages with high loan-to-value ratios may also require that you pay mortgage insurance premiums, which adds to your monthly costs.
Q: What are the requirements if I receive a gift to help with my down payment?
A: Sometimes a family member or other donor will help out with some or all of your down payment, and they don’t expect repayment. If you find yourself in this fortunate situation, you will need that donor to write a letter to your mortgage company letting them know that the money is a gift and not a loan. Specifically, your gift letter should include:
- The name, address, and phone number of the donor
- The donor’s relationship to you as the borrower
- The exact amount of the gift
- The date that the gift was provided
- A statement from the donor that they don’t expect repayment
- The donor’s signature
- The address of the property to be purchased
Even with this letter, you might need to provide additional evidence to satisfy a mortgage lender. For example, if you are getting an FHA loan, the donor may also be asked to provide a copy of their bank statement. This is something that you will want to let your donor know about in advance.
Q: What type of mortgage is best for me?
A: You have a choice of several different types of mortgages. Credit-wise, a conventional mortgage is more difficult to qualify for, but an FHA loan can be more costly. A VA loan could be the best choice if you are a veteran, and if you are buying a home in a rural area, you might want to consider a USDA mortgage that doesn’t have a down payment requirement. Please reach out to one of our Mortgage Loan Officers today to help find the best fit for your needs.
Q: Should I get a 15-year or 30-year term loan?
A: The loan term you choose depends on your budget and your desire for the best interest rate. A 15-year mortgage is going to have a higher monthly payment, but it will have a more favorable interest rate than a 30-year loan. The 15-year term will allow you to pay off your home in half the time as well as save a tremendous amount on interest over the life of the loan. Alternatively, a 30-year mortgage has a much lower monthly payment, which might fit better into your budget or allow you to buy a more expensive home.
Q: What is pre-qualification and why is it a good idea?
A: A pre-qualification is a mortgage company’s review of your basic finances to determine whether or not you would qualify for a loan. As a general rule, pre-qualifications are based on unverified information that you provide, which means this information will have to be reviewed. Therefor, there is no guarantee of a commitment to lend.
Q: What is the difference between pre-qualification and pre-approval?
A: When a homebuyer has a pre-qualification, they have only provided the lender with some basic financial information which allows them to see which loan programs they might qualify for. When a homebuyer is pre-approved, the lender has reviewed and verified all the information and the documentation needed to approve their loan while they are still looking for their new home. The only condition left in a pre-approval can be finding acceptable property if it has not already been located by the borrower.
Q: What documentation will I need for a mortgage?
A: When you apply for a mortgage, your lender may ask for many different items. As a general rule, you should have the following pieces of documentation prepared to submit with your application:
- Proof of identity, including a driver’s license, and Social Security card (or alternate ID)
- Income verification (Last two years’ tax returns, several recent pay stubs, W-2s, and 1099s)
- Bank statements
- Proof of funds for closing, including an explanation of the source if not obvious
- A gift letter if any of your down payment is coming from a generous donor
Q: How long does it take to close a loan?
A: The time to close a loan can vary based on several factors. Mortgage software provider Ellie Mae reports that the average purchase mortgage takes 45 days to close. This time can be shorter or longer depending on your loan and any potential issues that may come up prior to closing.
As a mortgage lender, our number one goal is to have your loan ready for closing. In general, the items that take the longest to receive are the title work, the appraisal, and the items that you need to submit to our office. We try to order the appraisal and title work as soon as possible to avoid delays. When you purchase a home, we commit to doing our best to meet the date agreed upon by you and the seller.
Q: What are closing costs?
A: When you hear the term “closing costs”, this refers to the sum of the charges that you will have to pay before your loan is complete. These costs can include title insurance, origination fees, prepaid escrows, and more.
Q: Will my monthly payments change over the term of the loan?
A: This is a possibility. Even when you have a fixed-rate loan, your payment can change because there are escrow portions of your payment that might be variable. For example, your insurance premiums or property taxes might fluctuate, which will cause your payment to change. Of course, a variable-rate loan can also lead to payment changes with interest rate adjustments.
Q: What is an appraisal?
A: An appraisal is the written estimate of your property’s current market value. It is based on the current condition of the property and its features, the neighborhood, and data from recent sales of similar properties. The bank needs an appraisal to have written proof of your home’s value to justify the amount of the loan that you will receive. Your lender will order the appraisal, but it will be performed by a third-party. There is a fee associated with this service that you are expected to pay to the appraisal company.
Q: What is escrow?
A: When you finance your home with a mortgage, you may be asked to put money into a savings account that guarantees the payment of certain expenses. This account is called an escrow account, and it pays ongoing expenses associated with owning a home such as insurance and taxes. When you close, you will pay a lump sum into this account. A certain amount is added to it each month through your mortgage payments, so when those expenses come due next, there is the proper amount of funds to pay them. Some examples of what can be escrowed are property taxes, homeowners insurance or flood insurance. In some cases, escrowing is required for some or all of these expenses.
Q: How are property taxes paid?
A: Since failing to pay property taxes can result in a lien or even foreclosure, your mortgage company wants to ensure that this expense is paid. Your monthly mortgage payments may include a portion for “prepaids” that are set aside in your escrow account. When your annual or semi-annual tax bill is due, the money is already set aside in your escrow account to make that payment. In some cases, you may be required to escrow for property taxes.
Q: What is PMI and what are its benefits?
A: PMI stands for Private Mortgage Insurance. This is an insurance policy that protects the mortgage lender in the event you default on the loan, and it may be required in some cases. If the amount of your loan is more than 80% of your home’s value, your lender is going to require that you have PMI.
This may not sound like a benefit to the borrower, but agreeing to PMI can have several advantages. First, you may be able to get a loan with a lower down payment. Second, you may be able to get your mortgage loan approved quicker. Even if you have the 20% to put down on a home, you might want to use some of those funds for another purpose. With PMI and the different loans available, you have a choice.
Q: Is homeowner’s insurance a requirement and, if so, why?
A: Even though insuring your home is the right thing to do, it may also be a requirement if you have a mortgage. When you take out a loan to purchase a home, your lender also has a stake in what happens to the property. If it is damaged or even lost in a disaster, both of your investments would be lost. For this reason, mortgage lenders require that you carry adequate insurance until you pay off your loan. In some cases, you may be required to escrow homeowner’s insurance.
Checklist
Be sure to have the following info to complete your pre-qualification or application.
Pre-qualification
- 30 days of pay stubs
- Two years of federal tax returns
- Checking, savings and investment account statements
- Two years of W-2s
Application
- A Social Security card
- A valid driver’s license or government-issued photo ID
- Address(es) from the past two years
- Employment history from the past two years
- Pay stubs from your current job
- W-2 forms for the past two years and K-1 forms (if applicable)
- Tax returns from the past two years
- Profit & loss statement and balance sheet (if self-employed)
- Bank statements from the past two months
- Investment account statements from the past two months
- Retirement account statements from the past two months
- Make and model of vehicles you own and their resale value
- Credit card account information
- Personal loan account information
Glossary
Acceleration Clause
Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.
Additional Principal Payment
A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).
Adjusted Basis
The cost of a property, plus the value of any capital expenditures for improvements to the property, minus any depreciation taken.
Adjustment Date
The date that the interest rate changes on an adjustable-rate mortgage (ARM).
Adjustment Period
The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).
Affordability Analysis
An analysis of a buyer’s ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
Amortization
The gradual repayment of a mortgage loan, both principle and interest, by installments.
Amortization Term
The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.
Annual Percentage Rate (APR)
The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans, however APR should not be confused with the actual note rate.
Appraisal
A written analysis prepared by a qualified appraiser and estimating the value of a property.
Appraised Value
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
Asset
Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
Assignment
The transfer of a mortgage from one person to another.
Assumability
An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.
Assumption Fee
The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.
Balance Sheet
A financial statement that shows assets, liabilities, and net worth as of a specific date.
Balloon Mortgage
A mortgage with level monthly payments that amortizes over a stated term but also requires that a lump sum payment be paid at the end of an earlier specified term.
Balloon Payment
The final lump sum paid at the maturity date of a balloon mortgage.
Before-tax Income
Income before taxes are deducted.
Bridge Loan
A second trust that is collateralized by the borrower’s present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as “swing loan.”
Cap
Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning and may cause negative amortization.
Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
Change Frequency
The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).
Closing
A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called “settlement.”
Closing Costs
These are expenses—over and above the price of the property—that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.
Compound Interest
Interest paid on the original principal balance and on the accrued and unpaid interest.
Consumer Reporting Agency (or Bureau)
An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and from other sources.
Credit Report
A report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.
Credit Risk Score
A credit score measures a consumer’s credit risk relative to the rest of the U.S. population, based on the individual’s credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Issac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.
Deed of Trust
The document used in some states instead of a mortgage. Title is conveyed to a trustee.
Default
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
Delinquency
Failure to make mortgage payments on time.
Deposit
This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.
Discount
In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate.
Down Payment
Part of the purchase price of a property that is paid in cash and not financed with a mortgage.
Effective Gross Income
A borrowers normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.
Equity
The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.
Escrow
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.
Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
Escrow Payment
The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
Fannie Mae
A congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds.
FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
FICO Score
FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.
First Mortgage
The primary lien against a property.
Fixed Installment
The monthly payment due on a mortgage loan including payment of both principal and interest.
Fixed-Rate Mortgage (FRM)
A mortgage interest that are fixed throughout the entire term of the loan.
Fully Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
GNMA
A government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.
Guarantee Mortgage
A mortgage that is guaranteed by a third party.
Housing Expense Ratio
The percentage of gross monthly income budgeted to pay housing expenses.
HUD-1 statement
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
A combination fixed rate and adjustable rate loan – also called 3/1,5/1,7/1 – can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs.
Index
The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time.The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.
Initial Interest Rate
This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It’s also known as “start rate” or “teaser.”
Installment
The regular periodic payment that a borrower agrees to make to a lender.
Insured Mortgage
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).
Interest
The fee charged for borrowing money.
Interest Accrual Rate
The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.
Interest Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.
Interest Rate Floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.
Late Charge
The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.
Liabilities
A person’s financial obligations. Liabilities include long-term and short-term debt.
Lifetime Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.
Lifetime Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.
Line of Credit
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.
Liquid Asset
A cash asset or an asset that is easily converted into cash.
Loan
A sum of borrowed money (principal) that is generally repaid with interest.
Loan-to-Value (LTV) Percentage
The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.
Lock-In Period
The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.
Margin
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Maturity
The date on which the principal balance of a loan becomes due and payable.
Monthly Fixed Installment
That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn’t cover all of the interest. The loan balance therefore increases instead of decreasing.
Mortgage
A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Banker
A company that originates mortgages exclusively for resale in the secondary mortgage market.
Mortgage Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.
Mortgage Insurance
A contract that insures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.
Mortgage Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance.
Mortgage Life Insurance
A type of term life insurance In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.
Mortgagor
The borrower in a mortgage agreement.
Net Worth
The value of all of a person’s assets, including cash.
Non Liquid Asset
An asset that cannot easily be converted into cash.
Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
Origination Fee
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.
Owner Financing
A property purchase transaction in which the party selling the property provides all or part of the financing.
Payment Change Date
The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date.
Periodic Payment Cap
A limit on the amount that payments can increase or decrease during any one adjustment period.
Periodic Rate Cap
A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
PITI Reserves
A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).
Points
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender.Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.
Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.
Pre-Approval
The process of determining how much money you will be eligible to borrow before you apply for a loan.
Prime Rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.
Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
Principal Balance
The outstanding balance of principal on a mortgage not including interest or any other charges.
Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.
Private Mortgage Insurance (PMI)
Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
Qualifying Ratios
Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
Rate Lock
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.
Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Real Estate Agent®
A real estate broker or an associate who is an active member in a local real estate board that is affiliated with the National Association of Real Estate Agents.
Recording
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.
Refinance
Paying off one loan with the proceeds from a new loan using the same property as security.
Revolving Liability
A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.
Secondary Mortgage Market
Where existing mortgages are bought and sold.
Security
The property that will be pledged as collateral for a loan.
Servicer
An organization that collects principle and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
Standard Payment Calculation
The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.
Total Expense Ratio
Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
Treasury Index
An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.
Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.
VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.