What are my options?
if I have no down payment, or only a small down payment?
Some loans will do 100% financing. Another similar
loan option is called a piggy-back loan, where you get approved
for the first and second mortgage at the same time. FHA loans
require only 3% down. No matter which of these types of loans
you obtain, the payment will be larger, your interest rate will
probably be higher, and you will be required to buy private
mortgage insurance (PMI).
What is private mortgage insurance (PMI)? Do I
have to pay it?
Private mortgage insurance is required if you
owe more than 80% on your house. This insurance protects the
lender if you cannot make your payments. When you default on
the loan, the insurance company pays the debt. The cost is added
onto your loan, and will be approximately an additional one
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% 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
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
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
Attorney Costs: paid for review of all documents needed to close
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
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
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
statements of income such as W-2's, pay stubs,
a list of any assets that you own
rental or mortgage history
employment history and current information
personal identification, including Green Card if applicable
Other pertinent items such as: Bankruptcy Discharge Notice or
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
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
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):
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
Glossary of Terms
Adjustable Rate Mortgage A mortgage loan were
the interest rate adjusts periodically based on the changes
of a specified index such as the one-year Treasury Bill or the
Amortization The calculation of the amount of
the installment payment it takes to pay off the obligation at
the end of a fixed period of time.
Annual Percentage Rate (APR) The total cost of
a mortgage stated as a yearly rate. It is typically higher than
the note rate because it includes the base interest rate plus
specific closing costs.
Appraisal A professional report that estimates
the market value of a property.
Assessed Value The value a tax authority places
on real property for the purpose of assessing yearly property
Balloon Mortgage A mortgage that is amortized
over a stated period but provides for a lump-sum payment due
at an earlier period, e.g. 30-year due in 15, where the payments
are based on 30-year repayment but the loan is due paid in full
in 15 years.
Cap Limits how much the interest rate on an adjustable
rate mortgage (ARM) can increase or decrease.
Cash to Close Liquid assets available to be used
to pay the closing costs involved with a mortgage transaction.
Collateral Property pledged as security for a
loan, such as property pledged as security for a mortgage.
Conventional Mortgage A mortgage not obtained
under a government-insured program.
Deed A legal document that is recorded in the
county conveying title to a property.
Deed of Trust The legal document that pledges
the property for the security of a mortgage loan.
Default Failure to make mortgage payments in a
timely manner or to comply with other requirements outlined
in the note.
Earnest Money Agreement (Sales Contract) The written
agreement between the buyer and seller of a property, which
stipulates the amount of the purchase, closing date and any
repairs or other conditions that must be met before the transaction
(purchase) is completed.
Easement A right of way given to persons other
than the owner for access to or over their property.
Equity The portion of a property's value over
and above the amount owed against it.
Escrow A disinterested third party that handles
legal documents and funds on behalf of the seller and buyer.
First Mortgage A real estate loan that has priority
over any other subsequently recorded mortgages.
Fixed Interest Rates An interest rate which does
not change during the term of the loan.
Foreclosure A legal procedure in which the mortgage
loan is in default and the property taken from the borrower
and sold by the lender to pay off the loan against the property.
Gift Letter A written letter signed by the individual
giving funds for the purpose of buying a home which states there
is no obligation to repay the sum of money being given.
Gross Monthly Income Total monthly income earned
before taxes or other deductions.
Hazard Insurance Also referred to as homeowners
or fire insurance; coverage for physical damage to a property
from fire, wind, vandalism or other hazards.
Home Equity Line of Credit (HELOC) Also referred
to as a revolving line of credit; usually a second mortgage,
which allows the borrower to obtain multiple advances up to
a specific credit limit.
Index Generally a published number or percentage,
such as the yield on the One-Year Treasury Bill, which is used
to compute the interest rate for an adjustable rate mortgage.
Jumbo Loan A loan that exceeds the Fannie Mae
legislated mortgage amount, which is currently $333,700. Jumbos
are also called non-conforming loans.
Legal Description Describes the location of the
property which has been recorded at the county.
Lien A legal claim or attachment against property
as security for a loan.
Loan-To-Value Ratio The ratio between the amount
of any mortgages against a property divided by the sales price
or appraised value.
Monthly Payment Usually the amount of principal,
interest, taxes and insurance paid each month on a mortgage
Mortgage The conveyance of an interest in real
property given as security for the repayment of a loan.
Origination Fee A fee paid to the lender for processing
a loan application. The origination fee is stated in the form
of points. One point equals one percent of the mortgage amount.
PITI Reserves A cash amount a borrower must have
left over after making a down payment and paying the closing
costs for the purchase of a home.
Private Mortgage Insurance (PMI) Insurance written
by a private company to protect the lender against loss resulting
from nonpayment or default.
Purchase Contract (Earnest Money Agreement/Offer)
A written agreement between a buyer and seller of real property,
setting forth the price and terms of the sale, also known as
a sales contract.
Qualifying Ratios Calculations that are used in
determining whether a borrower can qualify for a mortgage. The
two calculations are housing expense divided by gross income,
and the total debt including other monthly debt payments divided
by gross income.
Rate Lock A commitment issued by a lender to a
borrower guaranteeing a specific interest rate for a specific
period of time.
Title Insurance Provides insurance that public
records have been examined to insure that there are no liens
or other claims against the property.
Truth in Lending Act A federal law that requires
lenders to fully disclose 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 credit worthiness and risk involved
for the lender.
VA Loan A loan that is guaranteed by the U.S.
Department of Veterans Affairs, also known as a government loan.