FAQ's: Everything your need to know about your mortgage!


General Info

Q. How will I know how much I can qualify for?
A Loan Officer can work with you to get you qualified BEFORE you look for a home. Based upon information you present to the Loan Officer at the loan application, they will determine the approximate amount of money that you will be allowed to borrow. You will be "pre-qualified" for that loan amount. By allowing your Loan Officer to run your credit report and verify your assets and income, your loan application can be submitted to the underwriter for a full credit approval. We can help you obtain a complete written credit approval (subject to an appraisal) before you make an offer on a home, if you desire.
Q. What are income and debt ratios?
The Income Ratio is your total monthly housing expense divided by your gross monthly income (before taxes). The Debt Ratio is your total monthly housing expense PLUS any recurring debts (i.e. monthly credit card minimum payment, car payments, or other loan payments) divided by your income. Standard underwriting suggests a maximum guideline of 28% on the Income Ratio and 36% on the Debt Ratio, but these ratios can vary based on the loan program, the financial strength of the borrower and the down payment.
Q. What are "Cash Reserves"?
Cash Reserves are the funds a borrower has remaining after their loan funds. The normal requirement could be monies equal to 2 months of the mortgage payment. The amount of Cash Reserves varies by loan program, but larger reserves are a strong compensating factor.
Q. How much money do I need for a down payment and closing costs?
There are loan programs available that do not require any down payment. These loan programs have higher interest rates and they may have a prepayment penalty. For most loans a minimum down payment of 5% is required plus money for closing costs. Some programs allow the down payment and/or closing costs to be a gift from a family member. A Loan Officer can advise you about these different types of loans.
Q. What is Mortgage Insurance?
Mortgage Insurance insures lenders in the event of a borrower's foreclosure. It is paid for by the borrower, and allows lenders to grant loans that they otherwise would not consider. Depending on credit scores and loan structure, mortgage insurance may be required when the down payment is less than 20%.
Q. What if I am new on my job?
A new job can work in your favor when you apply for your loan. Loan program guidelines look for a 2 year job history in the same field, but a job change for a better position is looked on favorably. If you are a recent college graduate, you may be able to obtain a loan even though you don't have a 2 year work history.
Q. What does "loan to value" mean?
Loan to value (LTV) is the loan amount divided by the lesser of the sales price or appraised value. For example, if you are paying 15% of the total cost of the home as a down payment, you would only be borrowing 85% of the total sales price from the lender. Therefore your LTV would be 85%.
Q. How do I "lock-in" my interest rate?
A Loan Officer can "lock-in" the interest rate quoted, over the telephone during their pre-qualification interview with you. We will provide you a written Interest Rate and Price Determination Agreement which details the interest rate and terms of the loan you have requested, as well as the period of time the rate is locked. This may vary between 10 days and 60 days depending upon your projected closing date.
Q. What is an 80/10/10 and an 80/15/5?
An 80/10/10 is an 80% first lien, a 10% second lien and a 10% down payment. The 80/10/10 structure allows for 90% financing without mortgage insurance. When a borrower chooses to put less than 20% down for a down payment, he may either split the loan amount into two liens (80/10/10 for example), or he may opt to have one 90% lien and pay mortgage insurance. In the same manner, an 80/15/5 is an 80% first lien, a 15% second lien and a 5% down payment.
Q. What do I need to bring to closing?
The closing will take place at the title company. Each borrower will need to bring a valid driver's license the day of closing. The funds due at closing must be in the form of either a cashier's check made out to the title company or a wire transfer.
Q. How much do I need to insure my home for?
It is your responsibility to secure homeowner's insurance on the home you are purchasing prior to closing. The minimum dwelling coverage required is the lesser of either: a) The total combined loan amount or b) The replacement cost on the appraisal Because you may begin shopping for homeowner's insurance before the appraisal is in, it may be necessary to begin gathering quotes with a minimum dwelling coverage of the combined loan amount. You will be notified of the replacement cost once your appraisal is in.
Q. What is the Annual Percentage Rate on my Truth in Lending Document?
The Annual Percentage Rate (APR) is the cost of your credit expressed as an annual interest rate. Points and other prepaid finance charges are factored into the APR to show the true yield on the loan, which is why the APR is often higher than your note rate. The APR can be compared to the APR on other loan programs to give you a consistent means of comparing rates and programs.
Q. What are Discount Points and what are Origination Fees?
Let’s take the second question first. An origination fee is basically a cost for doing business and a very common practice throughout the industry. The fee charge is usually one percent (1%) of the loan amount. In some cases this fee can be waived, by electing to go with a slightly higher interest rate. Discount Points can be utilized in several ways. These, like origination fees, are a percentage of the loan amount used in different ways. Discount Points may represent the cost to buy down an interest rate, to buy out of a prepayment penalty affiliated with certain loan programs, to get you into a particular loan program, and even in lieu of an origination fee for tax purposes come tax time… please consult a CPA or IRS representative for more details.

Loan Types

Q. What is a full doc loan?
With this kind of loan all income and assets are documented.
Q. What do I need to verify my income
Earnings statements: 1-2 years of W-2 forms, most recent 30 day period pay stubs and possibly tax returns for the past two years. If you are self-employed or receive commission income: tax returns for previous two years Additional income: social security, overtime bonus, commission, interest income, veteran's benefits and so on. To use additional income like bonuses and commission, you must have been receiving it for at least two years, as we must show a two year average for that income to qualify.
Q. What do I need to verify my assets?
Most recent 1-2 months Bank Statements. All pages must be submitted for each statement. (For example, if your statement says page 1 of 5, we must have all five pages, even if the last page is blank.) Most recent 1-2 months retirement statements (IRA’s or stock portfolio statements. Again, all pages are required for these.
Q. What is an Easy Doc or No Doc Loan
Easy Doc and No Doc Loans With Easy / No Doc loans little or no documentation is provided to substantiate the borrower's income and assets. These loans are mostly for self-employed borrowers who have difficulty verifying all of their income, and for service industry employees, such as bartenders, waiters, and hair stylists that have pay which is difficult to determine precisely. These loans may be also used by borrowers who get most of their income from commissions, or by borrowers with very complex income structures. For example, a borrower who has income primarily from rental properties and investments may be hesitant to verify all sources of income due to the volumes of paperwork this would require. Additionally, borrowers who receive a good portion of their income in cash, such as tips, might also want to consider the Easy Doc loan. Because of the risk associated with Easy / No Doc loans, a borrower may have to make a larger down payment. In many cases, the LTV on a Easy / No Doc loan is limited to 70 -75%. Some lenders, however, will allow a 90% LTV. Credit standards are generally a little higher for Easy / No Doc loans. Borrowers must have maintained a good repayment history within the last two years. Additionally, some lenders will require borrowers to maintain higher bank balances than typical applicants usually must have. Lenders will assess higher interest rates and fees on loans when little or no documentation is provided to substantiate the borrower's income. Expect the interest rate to be about one-half to one percent more than the rates on a fully documented loan. Consequently, Easy and No Doc loans should only be used when necessary, not simply to avoid the paperwork requirements of a Full Documentation loan. Easy and No Doc loans could be classified into "Stated Income", "Stated Assets", "No Income Verification (NIV)", "No Income / No Asset (NINA)", "No Ratio", etc. With "Stated Income" loan, the borrower can simply state his income on the application, and do not have to provide any documentation to substantiate this stated income. Lenders usually verify that the borrower has assets that logically match the stated income. With "No Income / No Asset" loan no income and no assets are verified.
Q. What is a home equity line of credit?
A home equity line is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses. With a home equity line, you will be approved for a specific amount of credit. Your credit limit is the maximum amount you can borrow at any one time while you have the plan. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the appraised value of the home and subtracting the balance owed on the existing mortgage. For example: Appraisal of home $100,000 Percentage x75% Percentage of appraised value $75,000 Less mortgage debt -$40,000 Potential credit line $35,000 In determining your actual credit line, the lender also will consider your ability to repay, by looking at your income, debts, and other financial obligations, as well as your credit history. Home equity plans often set a fixed time during which you can borrow money, such as 10 years. When this period is up, the plan may allow you to renew the credit line. But in a plan that does not allow renewals, you will not be able to borrow additional money once the time has expired. Some plans may call for payment in full of any outstanding balance. Others may permit you to repay over a fixed time, for example 10 years. Once approved for the home equity plan, usually you will be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks. Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line (for example, $300) and to keep a minimum amount outstanding. Some lenders also may require that you take an initial advance when you first set up the line.
Q. What Conventional Loan?
Any mortgage loan other than an FHA, VA or an RHS loan is conventional one.
Q.What is an FHA Loan?
The Federal Housing Association (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), administers various mortgage loan programs. FHA loans have lower down payment requirements and are easier to qualify than conventional loans. FHA loans cannot exceed the statutory limit. FHA loans also allow for a co-signer.
Q. What is a VA Loan
VA loans are guaranteed by U.S. Department of Veterans Affairs. The guaranty allows veterans and service persons to obtain home loans with favorable loan terms, usually without a down payment. In addition, it is easier to qualify for a VA loan than a conventional loan. The U.S. Department of Veterans Affairs does not make loans, it guarantees loans made by lenders. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a VA loan.
Q What is a conforming loan?
Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These two stockholder-owned corporations purchase mortgage loans complying with the guidelines from mortgage lending institutions, packages the mortgages into securities and sell the securities to investors. By doing so, Fannie Mae and Freddie Mac, like Ginnie Mae, provide a continuous flow of affordable funds for home financing that results in the availability of mortgage credit for Americans. Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Fannie Mae and Freddie Mac announce new loan limits every year. Please call me if you would like to know the conforming limits for this year.
Q. What is a Jumbo Loan
Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as 'jumbo' loans. Because jumbo loans are bought and sold on a much smaller scale, they often have a little higher interest rate than conforming, but the spread between the two varies with the economy.
Q. What is a Fixed Rate Mortgage:
With fixed rate mortgage (FRM) loan the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 40, 30, 20, 15 years and 10 years. Generally, the shorter the term of a loan, the lower the interest rate you could get. The most popular mortgage terms are 30 and 15 years. With the traditional 30-year fixed rate mortgage your monthly payments are lower than they would be on a shorter term loan. But if you can afford higher monthly payments a 15-year fixed-rate mortgage allows you to repay your loan twice as faster and save more than half the total interest costs of a 30-year loan.
Q. What is an Adjustable Rate Mortgage?
Adjustable Rate Mortgages (ARM) Variable, or an adjustable loan, is loan whose interest rate, and accordingly monthly payments, fluctuates over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application.
Q. What is a negatively amotizing loan?
Some types of ARMs (for example, option ARM loans) offer payment caps rather than interest rate caps, which limit the amount the monthly payment can increase. If a loan has payment cap but has no periodic interest rate cap, then the loan may become negatively amortized: if the interest rates rise to the point that the monthly mortgage payment does not cover the interest due, any unpaid interest will get added to the loan balance, so the loan balance increases. However, you always have the option to pay the minimum monthly payment, or the fully amortized amount due. Example: Your loan has a payment cap of 7.5%. If your payment is $1,000 per month and interest rates rise, your new payment would normally be $1,200/mo (for example). But your capped payment is only $1,075. The other $125 get added to your loan balance, to be paid off over time, unless of course you decide to pay that additional amount now. The advantage of negatively amortizing loans is that you can control cash flow (relatively stable payment), take advantage of low interest rates relative to the market at any given time, and pay back the money borrowed today at a depreciated value years from now (because of natural inflation). This makes such loans a great tool for homeowners as long as you understand the mechanics of what's going on.
Q. Explain ARM adjustment rates
With most ARMs, the interest rate can adjust every month, every three or six months, once a year, every three years, or every five years. The interest rate on negatively amortized loans can adjust monthly. A loan with an adjustment period of 6 months is called a 6-month ARM, with an adjustment period of 1 year is called a 1-year ARM, and so on. Most ARMs offer an initial lower interest rate than the fully indexed rate (index plus margin) during the initial period of the loan, which could be one month or a year or more. It is also known as teaser rate. All ARMs are available with 30-year terms and some with 15- or 40-year terms. Adjustable rate mortgages generally have a lower initial interest rate than fixed rate loans.
Q. What is an Option ARM loan?
One of the most creative products that doesn't require a set payment each month is the option ARM. After the first payment, you get four payment options to choose from each month: your lender sends you a monthly statement offering a minimum payment (1), interest-only payment (2), 30-year amortized payment (3) or 15-year amortized payment (4).
Q. What is a Reverse Mortgage?
Reverse mortgages - a special type of home loan - are becoming popular in Americ They can give older Americans greater financial security to supplement social security, meet unexpected medical expenses, make home improvements, and more. Borrowers must be at least 62 years old and occupy as their principal residence a home that has little or no mortgage debt remaining. The maximum loan amount depends on the age of the borrower, the expected interest rate and the appraised value of the property. There are many payment options available. For example, borrowers may receive monthly payments for a fixed period they select, or as long as they occupy the home as a principal residence. Reverse mortgage need not be repaid until the borrower moves, sells or refinances the property, or dies. FHA insures the lender against the risk that proceeds from the sale of the property may not be sufficient to pay off the mortgage balance. If the property is sold, the homeowner (or heir) receives any proceeds in excess of the amount needed to pay off the mortgage

Credit Questions

Q. How is my Credit determined?
Your credit is broken into three primary categories: 1. Mortgage Credit -- Your payment history on your existing, or previous mortgage. The past repayment history on mortgage debt can be a good indication of a borrowers attitude toward mortgage obligations. Payment history on mortgage debt is very important in determining your credit grade. Obviously this relates to people who have owned a home before. 2. Consumer Credit -- This category relates to installment and revolving credit. Installment credit encompasses longer term credit with structured payment plans, such as car loans or student loans. Revolving credit encompasses department store and bank credit cards. Generally, payments received 30 days past the due date are reflected in the credit report as late. 3. Public Records -- The third category relates to public records such as previous bankruptcies, collections, foreclosures and judgements. The A borrower cannot have any bankruptcy within past 2-10 years. The D borrower could currently be in bankruptcy or foreclosure.
Q. What is a FICO Score?
Mortgage lenders and other creditors frequently use credit scores, known as FICO scores, to determine the credit risk. The higher the credit score, the better the credit risk. FICO stands for Fair Isaac Company, the company that created the original scoring system. Each credit bureau has its own unique system that allows them to offer a score based solely on the contents of the credit bureau’s data about an individual. However, a numerical score at one bureau is the equivalent of the same numerical score at another. Thus, a score of 700 from Experian indicates the same creditworthiness as a score of 700 from Trans Union or Equifax, even though the calculations used to determine those scores are different at each bureau. The scores range from 375 to 900 points, and in general, a score of 680 or above indicates a very good credit history. Average FICO scores fall into the range between 620 and 650.
Q. What if I don't have any established credit?
If you do not have enough established credit, your Loan Officer can work with you to document alternate credit information. If you have been renting, we can obtain a rental rating from your landlord as a way of verifying your payment history. Or, we can contact your utility companies, phone service, cable companies or car insurance carrier to obtain a rating on your payment history. Not all loan programs will accept alternative documentation on your credit. There are both government and conventional programs that will accept this type of payment history to establish credit qualifications.
Q. What if I have had credit problems in the past or have filed bankruptcy?
Your credit payment history lets the Lender know your intentions to repay the loan. Therefore a good credit history is important, but a perfect credit history is not. Credit counseling agencies specialize in meeting with clients and reviewing your credit history. If you have any outstanding credit obligations that need to be dealt with, the credit agency can work with you and help you make arrangements to pay any outstanding debts that you may have. First time home buyers can also attend seminars that will go through the home purchasing process and requirements with you.

Escrow Information

Q. What should I know about Escrows?
Real Estate Settlement Procedures Act (RESPA) -- Escrow Account Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc. RESPA also requires the lender to provide initial and annual escrow account statements. The newest escrow account regulations became effective in October 1997. Frequently Asked Questions about Escrow Accounts
Q. Does RESPA require borrowers to maintain an escrow account?
No. It is the lender's decision whether the borrower must maintain an escrow account for the purpose of paying taxes and other items. The HUD regulations only limit the maximum amount that a lender can require a borrower to maintain in an account.
Q. Does RESPA require lenders to maintain a cushion?
No. The RESPA statute and regulations do not require the lender to maintain a cushion. However, since 1976 the RESPA statute has allowed lenders to maintain a cushion equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lesser amount, the lesser amount prevails. The new accounting method generally requires borrowers to maintain lesser amount in the account than the single-item method predominately used by lenders. However, many lenders have recently increased the escrow account cushion to the maximum allowed by law. The recent regulations require lenders to reduce the size of the cushion in some accounts. Unfortunately, to avoid customer disapproval, some lenders may be giving their customers the impression that the HUD regulations require them to make this increase. This is a false impression. The lender, not HUD, has chosen to increase the cushion.
Q. Can HUD require lenders to pay interest on escrow accounts?
No. In 1992 and 1993, legislation was introduced in Congress that would have required lenders to pay interest on escrow account balances, but it never passed. Some states do require interest to be paid on escrow account funds, but many do not.
Q. My escrow account payments went up, rather than down. Why?
There could be a couple of reasons why your servicer is charging more for your escrow account. First, your bills may have gone up and the account changed to reflect that. Or, the servicer has changed the amount of cushion to the maximum amount allowed by RESP Check your statement from the servicer. You may also want to check your loan documents to figure out what is the appropriate cushion. If the mortgage loan documents are silent on the amount of the cushion or pre-accrual practices, then the RESPA "two month" limits apply, unless state law provides for a lower amount.
Q. What is the disbursement date for paying escrow account items?
The disbursement date means the date on which the lender actually pays an escrow item from the escrow account. However, the lender must pay the items in a timely manner, that is, on or before the deadline to avoid a penalty. This is required as long as the borrower's payment is not more than 30 days overdue. Borrowers should review their annual escrow statement to make certain the lender did not make late payments and charge any penalties to the borrower's account.
Q. I got a notice from the county that my lender did not pay my taxes on time and the county is assessing a penalty. Do I have to pay this bill?
Send the bill to the lender. The lender should pay the penalty for failing to pay the taxes on time as long you were current in your mortgage payments. If the lender refuses, you may wish to follow the guidelines for filing a complaint.
Q. Are lenders required to pay taxes on an annual basis if a discount is offered to the consumer?
No. The Department published a new rule in the Federal Register in January 1998. The rule clarifies what a lender should do when a taxing jurisdiction offers a choice of payment on an installment basis or an annual basis. If there is a discount to the consumer when disbursing on an annual basis or there is an additional charge for disbursing on an installment basis, the lender may disburse on an annual basis. Otherwise, the lender should disburse tax payments on an installment basis. The borrower and the lender may mutually agree to another disbursement basis or date. The Department encourages lenders to follow the preference of the borrower.
Q. What steps should I take if the lender does not pay my hazard insurance on time or at all and my insurance is canceled?
Lenders are required by Section 6 to make escrow account disbursements on time. If a lender fails to do so, a borrower may bring a private law suit under this Section. Therefore, if you incur any damages due to the lender's negligence, you may wish to consult an attorney. You should also contact your lender immediately and send a copy of the bill. Some lenders list a special address and/or FAX number for insurance and tax bills. Keep checking with the insurance company to make certain the bill is paid. You may wish to pay the insurance company directly to avoid cancellation of your policy and then seek a refund from your lender. Keep copies of all your correspondence and payments. If you incur any damages due to the lender's negligence, you may wish to consult an attorney.
Q. I got a notice that my hazard insurance has been canceled. My lender force-placed hazard insurance with a different company and it costs a lot more. Can a lender do this?
As long as your mortgage payment is not more than 30 days late, Section 6 of RESPA requires the lender to make escrow payments, for taxes, insurance, etc., in a timely manner. You should write to your lender and complain. If your lender does not refund the difference or otherwise resolve your complaint satisfactorily, you may wish to file a complaint with HUD or the Consumer Protection Office of your State Attorney General's Office. You may also wish to consult an attorney.
Q. What steps should I take if I think the lender is requiring too much money in my escrow account?
First, figure out the maximum amount RESPA allows to be required in your escrow account. If you still believe your lender is requiring too much money, you should contact your lender for an explanation. Section 6 of RESPA provides that borrowers may make a "qualified written request" to the lender concerning the servicing of their loan account. The request should not be included with the monthly mortgage payment. The lender must acknowledge the complaint within 20 business days and must resolve the complaint within 60 business days by correcting the account or giving a statement of the reasons for its position. If you do not get a satisfactory answer from the lender, you may wish to file a complaint with HUD. You should continue to make your mortgage payment during this time.

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Contact Information

Glen Reiley, Mortgage Consultant
The Glen Reiley Team
Bell Mortgage: A Division of State Bank and Trust
NMLS#:
4435 E. Chandler Blvd. #130
Phoenix, AZ 85048
(480) 753-6100
Fax: 480-355-3333
License: 0904081
The Glen Reiley Team