Mortgage Basics
Find the best mortgage information and resources available.
Mortgage Terms & Information
Fixed-rate or adjustable-rate mortgage? To escrow or not to escrow? Pre-qualification vs. pre-approval? Mortgage financing can seem confusing, but it doesn’t have to be. There are a few key things to understand, and the more you know, the more prepared you’ll be.
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Mortgage Application
Below is a list of documents that are required when you apply for a mortgage. However, every situation is unique and you may be required to provide additional documentation. So, if you are asked for more information, be cooperative and provide the information requested as soon as possible. It will help speed up the application process.
Your Property
- Verification of the deposit you placed on the home
- Names, addresses and telephone numbers of all realtors, builders, insurance agents and attorneys involved
- Copy of Listing Sheet and legal description if available (if the property is a condominium please provide condominium declaration, by-laws and most recent budget)
Your Income
- Copies of your pay-stubs for the most recent 30-day period and year-to-date
- Copies of your W-2 forms for the past two years
- Names and addresses of all employers for the last two years
- Letter explaining any gaps in employment in the past 2 years
- Work visa or green card (copy front & back)
If self-employed or receive commission or bonus, interest/dividends, or rental income:
- Provide full tax returns for the last two years PLUS year-to-date Profit and Loss statement (please provide complete tax return including attached schedules and statements. If you have filed an extension, please supply a copy of the extension.)
- K-1’s for all partnerships and S-Corporations for the last two years (please double-check your return. Most K-1’s are not attached to the 1040.)
- Completed and signed Federal Partnership (1065) and/or Corporate Income Tax Returns (1120) including all schedules, statements and addenda for the last two years. (Required only if your ownership position is 25% or greater.)
If you will use Alimony or Child Support to qualify:
- Provide divorce decree/court order stating amount, as well as, proof of receipt of funds for last year
If you receive Social Security income, Disability or VA benefits:
- Provide award letter from agency or organization
Source of Funds and Down Payment
- Sale of your existing home – provide a copy of the signed sales contract on your current residence and statement or listing agreement if unsold (at closing, you must also provide a settlement/Closing Statement)
- Savings, checking or money market funds – provide copies of bank statements for the last 3 months
- Stocks and bonds – provide copies of your statement from your broker or copies of certificates
- Gifts – If part of your cash to close, provide Gift Affidavit and proof of receipt of funds
- Based on information appearing on your application and/or your credit report, you may be required to submit additional documentation
Debt or Obligations
- Prepare a list of all names, addresses, account numbers, balances, and monthly payments for all current debts with copies of the last three monthly statements
- Include all names, addresses, account numbers, balances, and monthly payments for mortgage holders and/or landlords for the last two years
- If you are paying alimony or child support, include marital settlement/court order stating the terms of the obligation
- Check to cover Application Fee(s)
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Resources Available
Download our Mortgage Application Checklist
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Appraisals
Below is a list of documents that are required when you apply for a mortgage. However, every situation is unique and you may be required to provide additional documentation. So, if you are asked for more information, be cooperative and provide the information requested as soon as possible. It will help speed up the application process.
What is an Appraisal?
An Appraisal is an estimate of a property’s fair market value. It’s a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The Appraisal is performed by an “Appraiser” typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.
Why get an Appraisal
Obtaining a loan is the most common reason for ordering an Appraisal, however there are other reasons to get one:
- Contesting high property taxes
- Establishing the replacement cost for insurance purposes
- Divorce settlement
- Estate settlement
- Negotiating tool in real estate transactions
- Determining a reasonable price when selling real estate
- Protecting your rights in an eminent domain case
- A government agency requirement
- A lawsuit
What are Appraisal Methods?
There are 3 common approaches, or Appraisal Methods, used by Appraisers to establish property value. After thorough exercise of all 3, a final value estimate is correlated. When evaluating single-family, owner-occupied properties, the Sales Comparison Approach is heavily weighted by an Appraiser.
- Cost Approach – A formula is used to obtain the property value: Land value (vacant) added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
- Sales Comparison Approach – The Appraiser identifies 3 to 4 comparable comps, recently sold properties in the neighborhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property including square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.
- Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods.
Who owns the Appraisal?
The mortgage company owns the appraisal even though the borrower paid for it. This is because the mortgage company orders the appraisal on the borrower’s behalf, and the Appraiser lists that mortgage company on the report. The borrower does have the right to receive a copy; however it’s the mortgage company’s discretion to give the borrower the original appraisal report.
Can Another Mortgage Company be Used After the Completed Appraisal?
Yes. In most cases you will not have to pay for another appraisal if you change your mortgage company, and depending on the loan program typed, the first lender can transfer it to the new lender. Some appraisal firms may charge a small fee because additional clerical work is required to reflect the new mortgage company; this is called an “Appraisal Retype Fee”. The original mortgage company has the right to refuse to transfer the appraisal to another lender. In this case, a new appraisal is needed.
Who determines the market value of a property?
The property seller sets the price, especially for residential property, not the Appraiser. Sellers usually don’t order an appraisal because they want to obtain the highest price for their home and therefore don’t want to be bound by the Appraiser’s assessment.
The real estate agent receives a percentage of the price as compensation and often represents the seller in the transaction and assists them in setting the sale price. They perform a Comparative Market Analysis (CMA), which real estate agents in most states are allowed to perform without an Appraiser’s License or Certification. The CMA is vital to the agent’s preparation for a listing examining recent property sales in the neighborhood to arrive at a listing price. Typically the agent will suggest a price to the seller based on the CMA however the seller may choose to list their property for a higher price.
How can I assist my Appraiser?
It’s to your advantage to help the Appraiser perform the assessment by providing additional information:
- What is the purpose for the appraisal?
- Is the property listed for sale, and if so, for what price and with whom?
- Is there a mortgage? And if so, with whom, when placed, for how much and what type (FHA, VA, etc.), at what interest rate, or other type of financing?
- Are any personal properties or appliances included in the property?
- With an income-producing property, what is the income breakdown and expenses for the last year or two? A copy of the lease may be required.
- Provide a copy of the deed, survey, purchase agreement, or additional property papers.
- Provide a copy of the current real estate tax bill, statement of special assessments, or balance owed on anything, i.e. sewer, water, etc.
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Closing Costs
We have included a breakdown of what to expect in terms of closing costs after a property has been transferred over to you. You can find out what happens at closing, what statutory and third-party costs to expect and other charges and expenses that you should be aware of. It also includes a breakdown of finance and lender charges.
What Happens at Closing?
At closing, the ownership of the property is officially transferred from the seller to you. This may involve you, the seller, real estate agents, your attorney, the lender’s attorney, title or escrow firm representatives, clerks, secretaries, and other staff. You can have an attorney represent you if you can’t attend the closing meeting, i.e., if you’re out-of-state. Closing can take anywhere from 1-hour to several depending on contingency clauses in the purchase offer, or any escrow accounts needing to be set up.
Most paperwork in closing or settlement is done by attorneys and real estate professionals. You may or may not be involved in some of the closing activities; it depends on who you are working with.
Prior to closing you should have a final inspection, or “walk-through” to insure requested repairs were performed, and items agreed to remain with the house are there such as drapes, lighting fixtures, etc.
In most states the settlement is completed by a title or escrow firm in which you forward all materials and information plus the appropriate cashier’s checks so the firm can make the necessary disbursement. Your representative will deliver the check to the seller, and then give the keys to you.
What are Statutory Costs?
These are expenses you have to pay to state and local agencies, even if you paid cash for the house and didn’t need a mortgage:
Transfer Taxes – Required by some localities to transfer the title and deed from the seller to the buyer.
Deed Recording Fees – To pay for the County Clerk to record the deed and mortgage, and to change the property tax billing.
Pro-Rated Taxes – Such as school taxes and municipal taxes may need to be split between the buyer and the seller since they are due at different times of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2-months, and the seller would owe for the other 10-months. Pro-rated taxes are usually paid based on the number of days, not months of ownership. Some lenders may require you to set up an escrow account to cover these bills. If not, you may want to set one up yourself to insure the funds are set aside for these important expenses.
State & Local Fees – Other state and local mortgage taxes and fees may apply.
What are Third-Party Costs?
There may be expenses paid to others like inspectors or insurance firms, even if you paid cash for the property:
Attorney Fees – You may want to hire an attorney when purchasing a home. They usually charge a percentage of the selling price up to 1%, or some work on an hourly basis or for a flat fee.
Title Search Costs – Usually your attorney will perform or will arrange for the title search to ensure there are no obstacles such as liens or lawsuits regarding the property. Or you may work with a title company to verify a clear property title.
Homeowner’s Insurance – Most lenders require you prepay the first year’s premium for homeowners insurance, sometimes called hazard insurance, and must show proof of payment at the closing. This insures that the investment will be secured even if the property is destroyed.
Real Estate Agent’s Sales Commission – The seller pays the real estate agent’s commission, and if one agent lists the property and another sells it, the commission is usually split. The commission is negotiable between the seller and the agent.
What are Finance and Lender Charges?
Most people associate closing costs with finance charges levied by mortgage lenders. The charges you pay will vary among lenders, so it’s good to shop around for the best combination of mortgage terms and closing, or settlement costs:
Origination Fee – For processing the mortgage application there may be a flat fee, or a percentage of the mortgage loan.
Credit Report – Most lenders require a credit report on you and your spouse, or an equity partner. This fee is often a part of the origination fee.
Points – One point is equal to 1% of the amount borrowed and can be payable when the loan is approved either before or at closing. Points can be shared with the seller which is negotiable in the purchase offer. Some lenders will let you finance points which will add to the mortgage cost. If you pay the points up front they are tax deductible in the year they are paid. Different deductibility rules apply to second home loans.
Lender’s Attorney’s Fees – For your attorney to draw-up documents and to ensure that the title is clear, and for representation at the closing.
Document Preparation Fees – There are several documents and papers prepared during the home-buying process ranging from the application to the closing. Lenders may charge for this, or the fees may be included in the application and/or attorney’s fees.
Preparation of Amortization Schedule – Some lenders will prepare a detailed amortization for the full term of your mortgage. This is usually done for fixed mortgages or adjustable mortgages.
Land Survey – Lenders may require that the property be surveyed to ensure it has not been encroached and to verify the buildings and improvements to the property.
Appraisals – Professional Appraisers can do a comparison of the value of the property to that of other recently sold neighborhood properties. Lenders want to be sure the property is worth the value of the mortgage loan.
Lender’s Mortgage Insurance – If your down payment is 20% or less, many lenders require that you purchase Private Mortgage Insurance (PMI) for the loan amount. If you should default on your loan, the lender will recover their money. These insurance premiums will continue until your principal payments, plus the down payment equal 20% of the selling price and may continue for the life of the loan. The premiums are usually added to any amount you must escrow for taxes and homeowner’s insurance.
Lender’s Title Insurance – Even with a title search for any property obstacles, liens or lawsuits, many lenders require insurance to protect their mortgage investment. This is a 1-time insurance premium usually paid at closing, and is for the lender only, not the homebuyer.
Release Fees – If the seller has worked with a contractor who put a lien on the house and is expecting payment from the proceeds of the house sale, there may be fees to release the lien. The seller usually pays these fees which could be negotiated in the purchase offer.
Inspections Required by Lenders – The lender may require a Termite Inspection if you apply for an FHA or a VA mortgage loan. In many rural areas a water test may be required to ensure the well and water system will maintain an adequate water supply to the house; for quantity not quality. Depending on the sales contract and property type, additional inspections may be required.
Prepaid Interest – The first regular mortgage payment is usually due from 6-8 weeks from closings; however, interest costs begin at closing time. The lender will calculate the interest owed for that period of time, and that fraction of interest is sometimes due at closing.
Escrow Account – Lenders often require that you set-up an Escrow Account, where you will make monthly payments to, for taxes, homeowner’s insurance, and sometimes PMI (Private Mortgage Insurance). The amount placed in this account at closing depends on when property taxes are due and the timing of the settlement transaction. The lender can give you a cost approximation during the application process of your mortgage loan.
Are There Any Other Up-Front Expenses?
The major portion of other up-front expenses is the deposit or binder you make at the time of the purchase offer, the remaining cash down payment you make at closing, or can include:
Inspections – Lenders may require inspections, and you can make your purchase offer contingent based on satisfactory completion of some other inspections such as structural, water quality tests, septic, termite, roof and radon tests. You and the seller can negotiate these inspection fees.
Owner’s Title Insurance – You may want to purchase title insurance in case of unforeseen problems so you’re not left owing a mortgage on property you longer own. A thorough title search ensures a clear title.
Appraisal Fees – You may want to hire an Appraiser either before you sign a purchase offer, or after reviewing the lender’s appraisal report.
Money to the Seller – You’ll need to pay for items in the house you want that were not negotiated in the purchase offer such as appliances, light fixtures, drapes, lawn furniture, or fuel oil and propane left in tanks.
Moving Expenses – If you are changing jobs, your new employer may pay for your relocation, otherwise you must figure in the moving costs such as truck rentals, professional movers, cash for utility deposits like telephone, cable, electricity, etc.
Escrow Account Funds – In the purchase offer, you can request that the seller set up an Escrow Account to defray any costs for major cleanup, radon mitigation procedures, house painting, appliance repairs, etc. Depending on the purchase offer contract and contingency clauses, you may discover that you have expenses upon moving in.
Example: Your purchase offer contract has a clause making the purchase contingent on a satisfactory structural inspection, and it’s determined that the house needs a new roof. You can negotiate to have the seller arrange for the work to be done but, this will delay the closing date. You may have to agree to a higher price for house, or to pay some of the new roof repair expenses. Or you and the seller may split the cost using estimates from a contractor of your choice, and each of you will put funds into an Escrow Account. Or, the seller may be willing to reduce the sale price of the house, but either way cash will be needed for the new roof.
Time Investment – One often overlooks major up-front costs in buying a home. The time and expenses invested in house-hunting, which can take up to 4-months, plus the time spent searching for the best mortgage for you, the right real estate agent, an attorney, and other related things that take up your valuable time.
What is RESPA?
The Real Estate Settlement Procedures Act (RESPA) contains information regarding the settlement or closing costs you are likely to face. Within 3-days from the time of your mortgage application, your lender is required to provide you a “good faith estimate of settlement costs” (GFE) based on their understanding of your purchase contract. This estimate will indicate how much cash you will need at closing to cover prorated taxes, first month’s interest, and other settlement costs.
RESPA requires lenders to give you an information booklet about settlement costs, written by the U.S. Department of Housing & Urban Development which address how to negotiate a sales contract, ways to work with professionals like attorneys, real estate agents, lenders, etc, and your given rights as a home buyer. It gives an example of the Uniform Settlement Statement used at your closing. You are entitled to see a copy of the statement 1-business day prior to closing indicating your final costs.
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Credit
Below is a breakdown of useful information relating to credit, your credit score, and credit reporting. We look at how credit scores are calculated and used to help you obtain a mortgage, and ways to improve your current credit rating. There is also information relating to what type of information is used to determine your credit score.
What is a credit report?
Your credit payment history is recorded in a file or report. These files or reports are maintained and sold by “consumer reporting agencies” (CRAs). One type of CRA is commonly known as a credit bureau. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge account, a personal loan, insurance, or a job. Your credit record contains information about your income, debts, and credit payment history. It also indicates whether you have been sued, arrested, or have filed for bankruptcy.
Do I have a right to know what’s in my report?
Yes, if you ask for it. The CRA must tell you everything in your report, including medical information, and in most cases, the sources of the information. The CRA also must give you a list of everyone who has requested your report within the past year-two years for employment related requests.
What type of information do credit bureaus collect and sell?
Credit bureaus collect and sell four basic types of information:
Identification and employment information
Your name, birth date, Social Security number, employer, and spouse’s name are routinely noted. The CRA also may provide information about your employment history, home ownership, income, and previous address, if a creditor requests this type of information.
Payment history
Your accounts with different creditors are listed, showing how much credit has been extended and whether you’ve paid on time. Related events, such as referral of an overdue account to a collection agency, may also be noted.
Inquiries
CRAs must maintain a record of all creditors who have asked for your credit history within the past year, and a record of those persons or businesses requesting your credit history for employment purposes for the past two years.
Public record information
Events that are a matter of public record, such as bankruptcies, foreclosures, or tax liens, may appear in your report.
What is credit scoring?
Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points — a credit score — helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.
The most widely use credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. Your score will fall between 350 (high risk) and 850 (low risk).
Because your credit report is an important part of many credit scoring systems, it is very important to make sure it’s accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:
Equifax: (800) 685-1111
Experian (formerly TRW): (888) EXPERIAN (397-3742)
Trans Union: (800) 916-8800
These agencies may charge you up to $9.00 for your credit report.
You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. This free credit report may not contain your credit score and can be requested through the following website: https://www.annualcreditreport.com
Why is credit scoring used?
Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.
How is a credit scoring model developed?
To develop a model, a creditor selects a random sample of its customers, or a sample of similar customers if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness. Then, each of these factors is assigned a weight based on how strong a predictor it is of who would be a good credit risk. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company.
Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like — race, sex, marital status, national origin, or religion — as factors. However, creditors are allowed to use age in properly designed scoring systems. But any scoring system that includes age must give equal treatment to elderly applicants.
How reliable is the credit scoring system?
Credit scoring systems enable creditors to evaluate millions of applicants consistently and impartially on many different characteristics. But to be statistically valid, credit scoring systems must be based on a big enough sample. Remember that these systems generally vary from creditor to creditor.
Although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately, and more impartially than individuals when it is properly designed. And many creditors design their systems so that in marginal cases, applicants whose scores are not high enough to pass easily or are low enough to fail absolutely are referred to a credit manager who decides whether the company or lender will extend credit. This may allow for discussion and negotiation between the credit manager and the consumer.
What can I do to improve my score?
Credit scoring models are complex and often vary among creditors and for different types of credit. If one-factor changes, your score may change — but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application.
Nevertheless, scoring models generally evaluate the following types of information in your credit report:
- Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
- What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
- How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
- Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at “inquiries” on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not counted.
- How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.
Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.
To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It’s likely to take some time to improve your score significantly.
What happens if you are denied credit or don’t get the terms you want?
If you’ve been denied credit, or didn’t get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application. If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information.
If you are denied credit, the Equal Credit Opportunity Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within 60 days. Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: “Your income was low” or “You haven’t been employed long enough.” Unacceptable reasons include: “You didn’t meet our minimum standards” or “You didn’t receive enough points on our credit scoring system.”
If a creditor says you were denied credit because you are too near your credit limits on your charge cards or you have too many credit card accounts, you may want to reapply after paying down your balances or closing some accounts. Credit scoring systems consider updated information and change over time.
Sometimes you can be denied credit because of information from a credit report. If so, the Fair Credit Reporting Act requires the creditor to give you the name, address and phone number of the credit reporting agency that supplied the information. You should contact that agency to find out what your report said. This information is free if you request it within 60 days of being turned down for credit. The credit reporting agency can tell you what’s in your report, but only the creditor can tell you why your application was denied.
Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) is designed to help ensure that CRAs furnish correct and complete information to businesses to use when evaluating your application.
Your rights under the Fair Credit Reporting Act:
- You have the right to receive a copy of your credit report. The copy of your report must contain all of the information in your file at the time of your request.
- You have the right to know the name of anyone who received your credit report in the last year for most purposes or in the last two years for employment purposes.
- Any company that denies your application must supply the name and address of the CRA they contacted, provided the denial was based on information given by the CRA.
- You have the right to a free copy of your credit report when your application is denied because of information supplied by the CRA. Your request must be made within 60 days of receiving your denial notice.
- If you contest the completeness or accuracy of information in your report, you should file a dispute with the CRA and with the company that furnished the information to the CRA. Both the CRA and the furnisher of information are legally obligated to reinvestigate your dispute.
- You have a right to add a summary explanation to your credit report if your dispute is not resolved to your satisfaction.
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Foreclosure
Below is a summary of what a foreclosure means, how it occurs and how to avoid it. It also discusses what happens if you miss a payment on your mortgage. The information provided looks at short-term and long-term issues that can cause foreclosures and offers ways to prevent a foreclosure from happening.
What is Foreclosure?
It’s when a homeowner is unable to make principal and/or interest payments on their mortgage. The lender, a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract.
What Happens When a Mortgage Payment is Missed?
Unfortunately, Foreclosure can happen. By missing a mortgage payment, your lender has the legal means to repossess your home and force you to move out. If your property is worth less than the total amount you owe on your loan, a Deficiency Judgment could be pursued. Both a Foreclosure and a Deficiency Judgment can affect your ability to qualify for credit in the future. So you should avoid foreclosure, if possible.
How Can a Foreclosure be Avoided?
First of all, if you are struggling to make your payments, call or write to your lender’s Loss Mitigation Department right away. Explain your situation and be prepared to provide them with financial information like your monthly income and expenses. Just follow these 3 simple rules:
- Contact your lender as soon as you know your payment will be late.
- Never ignore the lender’s letters or phone calls.
- Don’t assume that your situation is hopeless.
What are Some Other Solutions for “Long-Term” Problems to Avoid Foreclosure?
Your lender will determine if you qualify for the following alternate solutions. Also, a housing counseling agency can help you with your options, plus interact with your lender on your behalf:
Mortgage Modification – If you can currently make your regular payment, but can’t catch-up on the past due amount, the lender may agree to modify your mortgage. One way is to add the past due amount into your existing loan and finance it long-term. Mortgage Modification may also be possible if you no longer can make your payments at the former level. The lender may modify your mortgage and extend the loan length, or perhaps take steps to reduce your current payments.
Pre-Foreclosure Sale – Foreclosure can be avoided by selling your property for a lesser amount necessary to pay off your mortgage loan. You may qualify if:
- The loan is at least 2 months delinquent
- The house is sold within 3-5 months
- A new appraisal, that the lender will obtain, indicates that the home value meets program guidelines.
Deed in Lieu of Foreclosure – This is when the lender allows you to give-back your property and forgives the debt. It does have a negative impact on your credit record; however it’s better than foreclosure. The lender may require that house be “For Sale” for a specific time period before agreeing. This route may not be possible if there are other liens against the home.
For FHA Loans – The lender may assist you in getting a one-time payment from the FHA Insurance Fund. The mortgage loan must be into at least 4-months, but not more than 12-months past due. The homeowner must prove the ability to resume making full mortgage payments on time, and other conditions apply:
- A Promissory Note must be signed allowing HUD to place a lien on your property for the amount received from the FHA Insurance Fund.
- The note is interest free, but must be repaid eventually.
- The note becomes due when you pay off the loan, transfer title, or sell the property.
For VA Loans – The Veteran’s Administration Loan Centers offer financial services designed to help homeowners avoid Foreclosure, and options for your specific situation.
What are Some Other Solutions for “Temporary” Problems to Avoid Foreclosure?
Forbearance – It may be allowed to delay payments for a short period with the understanding that another option will be used to bring the account current later.
Repayment Plan – If your account is past due, but you can now make regular payments again, the lender may allow you to catch-up by adding a portion of the overdue amount to a certain number of monthly payments until your account becomes current.
Partial Claim – Your lender may be able to help you obtain a one-time payment from the FHA Insurance Fund to bring your mortgage current, if you qualify:
You may qualify if:
1) Your loan is at least 4-months delinquent, but not more than 12-months.
2) You are able to begin making full mortgage payments again.
When your lender files a Partial Claim on your behalf, the U.S. Department of Housing & Urban Development will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note and a Lien will be placed on your property until the note is fully paid. The note is interest-free and is due when you pay off the first mortgage, or when the property is sold.
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Refinance
Below you will find a good amount of information about refinancing to help you decide whether it’s right for you or not. Included is advice about refinancing options, associated costs of refinancing, and tips on locking-in loan rates.
When I should refinance?
It’s generally a good time to refinance when mortgage rates are 2% lower than the current rate on your loan. It may be a viable option even if the interest rate difference is only 1% or less. Any reduction can trim your monthly mortgage payments. Example: Your payment, excluding taxes and insurance, would be about $770 on a $100,000 loan at 8.5%; if the rate were lowered to 7.5%, your payment would then be $700, now you’re saving $70 per month. Your savings depends on your income, budget, loan amount, and interest rate changes. Your trusted lender can help you calculate your options.
Should I refinance if I plan on moving soon?
Most lenders charge fees to refinance a loan. So, if you plan to only stay in the property for a couple of years, your monthly savings may not accumulate to recoup these costs. Example: A lender charged $1,000 to refinance your loan that resulted in saving you $50 each month; it would take 20-months to recoup your initial costs. Some lenders will charge a slightly higher than average interest rate on refinance loans, but will waive all costs associated with the loan. This will depend on the interest rate on your current loan.
How much will it cost me to refinance?
Starting with an application fee for $250 – $350, you may need to pay an origination fee typically 1% of your loan amount. In most cases you will pay the same costs you had with your current home loan for the title search, title insurance, lender fees, etc. The total sum could cost up to 2-3% of the loan amount. If you don’t have the funds to pay for associated loan costs, you can search for lenders that offer “no-cost” loans which will charge a slightly higher interest rate.
Should I lock-in my loan rate?
It’s unsure how interest rates will move at any given time, but your lender may estimate where interest rates are headed. If interest rates are expected to be volatile in the near future, considering locking your interest rate may be good because it allows you to qualify for the loan. Or, if your budget could handle a higher loan payment, or lender’s lock fees, you may want to let interest rates “float” until the loan closing.
Should I choose the lender with the lowest interest rate and costs?
There are two important things to consider when choosing one lender over another one:
- Quality of Service – Especially for first-time homebuyers who will have many questions about the total financing process and available loan options. Finding a lender with outstanding service skills that you trust will comfortably guide you every step of the way, so ask questions, even before you fill-out an application.
- Cost of Services – It’s good to ask potential lenders upfront what they charge for their services and any fees involved. They should be able to give you facts and get you through the financing process so that you feel confident knowing that you made a good decision by choosing them.
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Home Mortgages
Frequently Asked Questions
Below are some frequently asked questions related to residential loans. Have other questions or need some help? Our team of mortgage loan advisors are here to help you at any stage of your buying or refinancing process!
When should I refinance?
It’s generally a good time to refinance when mortgage rates are 2% lower than the current rate on your loan. It may be a viable option even if the interest rate difference is only 1% or less. Any reduction can trim your monthly mortgage payments. Example: Your payment, excluding taxes and insurance, would be about $770 on a $100,000 loan at 8.5%; if the rate were lowered to 7.5%, your payment would then be $700, now you’re saving $70 per month. Your savings depends on your income, budget, loan amount, and interest rate changes. Your trusted lender can help you calculate your options.
What are points?
A point is a percentage of the loan amount, or 1-point = 1% of the loan, so one point on a $100,000 loan is $1,000. Points are costs that need to be paid to a lender to get mortgage financing under specified terms. Discount points are fees used to lower the interest rate on a mortgage loan by paying some of this interest up-front. Lenders may refer to costs in terms of basic points in hundredths of a percent, 100 basis points = 1 point, or 1% of the loan amount.
Should I pay points to lower my interest rate?
Yes, if you plan to stay in the property for a least a few years. Paying discount points to lower the loan’s interest rate is a good way to lower your required monthly loan payment, and possibly increase the loan amount that you can afford to borrow. However, if you plan to stay in the property for only a year or two, your monthly savings may not be enough to recoup the cost of the discount points that you paid up-front.
What is an APR?
The annual percentage rate (APR) is an interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan. The APR is designed to measure the “true cost of a loan.” It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.
The APR does not affect your monthly payments. Your monthly payments are strictly a function of the interest rate and the length of the loan.
Because APR calculations are effected by the various different fees charged by lenders, a loan with a lower APR is not necessarily a better rate. The best way to compare loans is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. You can then delete the fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.
The following fees are generally included in the APR:
- Points – both discount points and origination points
- Pre-paid interest. The interest paid from the date the loan closes to the end of the month.
- Loan-processing fee
- Underwriting fee
- Document-preparation fee
- Private mortgage-insurance
- Escrow fee
The following fees are normally not included in the APR:
- Title or abstract fee
- Borrower Attorney fee
- Home-inspection fees
- Recording fee
- Transfer taxes
- Credit report
- Appraisal fee
What does it mean to lock the interest rate?
Mortgage rates can change from the day you apply for a loan to the day you close the transaction. If interest rates rise sharply during the application process it can increase the borrower’s mortgage payment unexpectedly. Therefore, a lender can allow the borrower to “lock-in” the loan’s interest rate guaranteeing that rate for a specified time period, often 30-60 days, sometimes for a fee.
What documents do I need to prepare for my loan application?
Below is a list of documents that are required when you apply for a mortgage. However, every situation is unique and you may be required to provide additional documentation. So, if you are asked for more information, be cooperative and provide the information requested as soon as possible. It will help speed up the application process.
Your Property
- Copy of signed sales contract including all riders
- Verification of the deposit you placed on the home
- Names, addresses and telephone numbers of all realtors, builders, insurance agents and attorneys involved
- Copy of Listing Sheet and legal description if available (if the property is a condominium please provide condominium declaration, by-laws and most recent budget)
Your Income
- Copies of your pay-stubs for the most recent 30-day period and year-to-date
- Copies of your W-2 forms for the past two years
- Names and addresses of all employers for the last two years
- Letter explaining any gaps in employment in the past 2 years
- Work visa or green card (copy front & back)
If self-employed or receive commission or bonus, interest/dividends, or rental income:
- Provide full tax returns for the last two years PLUS year-to-date Profit and Loss statement (please provide complete tax return including attached schedules and statements. If you have filed an extension, please supply a copy of the extension.)
- K-1’s for all partnerships and S-Corporations for the last two years (please double-check your return. Most K-1’s are not attached to the 1040.)
- Completed and signed Federal Partnership (1065) and/or Corporate Income Tax Returns (1120) including all schedules, statements and addenda for the last two years. (Required only if your ownership position is 25% or greater.)
If you will use Alimony or Child Support to qualify:
- Provide divorce decree/court order stating amount, as well as, proof of receipt of funds for last year
If you receive Social Security income, Disability or VA benefits:
- Provide award letter from agency or organization
Source of Funds and Down Payment
- Sale of your existing home – provide a copy of the signed sales contract on your current residence and statement or listing agreement if unsold (at closing, you must also provide a settlement/Closing Statement)
- Savings, checking or money market funds – provide copies of bank statements for the last 3 months
- Stocks and bonds – provide copies of your statement from your broker or copies of certificates
- Gifts – If part of your cash to close, provide Gift Affidavit and proof of receipt of funds
- Based on information appearing on your application and/or your credit report, you may be required to submit additional documentation
Debt or Obligations
- Prepare a list of all names, addresses, account numbers, balances, and monthly payments for all current debts with copies of the last three monthly statements
- Include all names, addresses, account numbers, balances, and monthly payments for mortgage holders and/or landlords for the last two years
- If you are paying alimony or child support, include marital settlement/court order stating the terms of the obligation
- Check to cover Application Fee(s)
How is my credit judged by lenders?
Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points — a credit score — helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.
The most widely use credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. Your score will fall between 350 (high risk) and 850 (low risk).
Because your credit report is an important part of many credit scoring systems, it is very important to make sure it’s accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:
Equifax: (800) 685-1111
Experian (formerly TRW): (888) EXPERIAN (397-3742)
Trans Union: (800) 916-8800
These agencies may charge you up to $9.00 for your credit report.
You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. This free credit report may not contain your credit score and can be requested through the following website: https://www.annualcreditreport.com
What can I do to improve my credit score?
- Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
- What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
- How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
- Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at “inquiries” on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not counted.
- How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.
What is an appraisal?
What is PMI (Private Mortgage Insurance)?
What is 80-10-10 financing?
What happens at closing?
The property is officially transferred from the seller to you at “Closing” or “Funding”.
At closing, the ownership of the property is officially transferred from the seller to you. This may involve you, the seller, real estate agents, your attorney, the lender’s attorney, title or escrow firm representatives, clerks, secretaries, and other staff. You can have an attorney represent you if you can’t attend the closing meeting, i.e., if you’re out-of-state. Closing can take anywhere from 1-hour to several depending on contingency clauses in the purchase offer, or any escrow accounts needing to be set up.
Most paperwork in closing or settlement is done by attorneys and real estate professionals. You may or may not be involved in some of the closing activities; it depends on who you are working with.
Prior to closing you should have a final inspection, or “walk-through” to insure requested repairs were performed, and items agreed to remain with the house are there such as drapes, lighting fixtures, etc.
In most states the settlement is completed by a title or escrow firm in which you forward all materials and information plus the appropriate cashier’s checks so the firm can make the necessary disbursement. Your representative will deliver the check to the seller, and then give the keys to you.
Downloadables
Mortgage Freebies
To help you understand your mortgage options, we have included a number of handy downloadable materials to help you find the best residential mortgage loans. Included is a handy mortgage application checklist to make sure that you have considered all possibilities before making your application.
