FAQ

A point is a percentage of the loan amount. 1-point = 1% of the loan amount, 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.

You should consider this if you plan to stay in the property for at 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 a shorter amount of time, your monthly savings may not be enough to recoup the cost of the discount points that you paid up-front.

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 considers points and other closing 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 affected by the various fees charged by lenders, escrow and title companies, a loan with a lower APR does not necessarily guarantee a better interest 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

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.

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 addendums
• 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

Your Income

• Copies of your paystubs for the most recent 30-day period
• Copies of your W-2 forms for the past two years
• Names and addresses of all employers for the last two years

If self-employed or receive commission or bonus, interest/dividends, or rental income:
• Provide full tax returns for the last two years
• 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 6 months

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 most recent 2 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

Credit scoring is system creditors use to help determine whether to extend 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 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

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 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 accounts more than 30 days late, had an account referred to collections, or have declared bankruptcy.
• 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 influence 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.

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 full 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.

On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. The best way to avoid this extra expense is to make a 20% down payment or ask about other loan program options.

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 ensure 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.

Before you start home shopping, take a close look at your current spending. For most people, buying a new home means taking on new expenses — whether you are currently renting or already own a home.

You need a clear understanding of how much you’re currently spending to decide what you can comfortably afford to spend on a new home.

Now that you have a clear picture of your current spending habits, you can develop a forward-looking budget for how you’ll spend your money once you’ve bought a new home. This lets you decide on a target monthly home payment.

Now that you have a good sense of what you can comfortably afford on a monthly basis, it’s time to look at your savings and determine how much you can afford for a down payment.

Once you know your estimated down payment amount, one of your credit scores, and a few other details, you can use our tools to figure out what interest rate you might expect to pay for a mortgage. This lets you get a realistic estimate of the home price range that you can comfortably afford.

Buying a home is a big financial decision. Now that you’ve looked at your finances and estimated how much you can afford to pay for a home, consider whether now is the right time for you to buy.

Buying a home and choosing a mortgage can be complicated. It helps to have people you can talk things over with. People tend to do best when they rely on a network of trusted advisors – not just one person – to help them through the process.

Your friends, relatives, and co-workers can all serve as advisors in this process – they don’t have to be professionals.

In the Explore loan choices phase, you will talk with several lenders to get acquainted. You’ll need to give these lenders some information about your finances. It’s best to gather this information now, so you’ll have it ready at your fingertips.