You, if you’re getting the mortgage.
This is an informal opinion a lender gives you about your ability to borrow money. Unfortunately, many lending institutions use pre-qualification as an often meaningless promotional gimmick to entice you into using their product.
A pre-approval is more meaningful. A pre-approval tells you the maximum the lender will give you. It usually is conditional upon the appraised value of the home you are buying, a title search, and other property-related issues. The credit-related issues have been resolved. Some lenders charge you hundreds of dollars for a pre-approval. At most banks, pre-approvals are free.
FHA and VA
These are governmental agencies with programs that may help you obtain an easier or cheaper loan. Read on.
The Federal Housing Authority was formed to help persons with lower income buy a home. If you qualify for an FHA loan, your mortgage company may accept a smaller down payment. It may have a lower interest rate, but often a conventional mortgage is just as good (if not better). We’ll tell you if you qualify for an FHA loan. The FHA doesn’t make loans itself, it guarantees that you will pay your loan.
VA mortgage loan
If you are on active duty, are a former spouse of a person in the military, or are a veteran – and if you’re eligible, a Veteran’s Administration (VA) loan can be a good choice. VA mortgages don’t require any down payment as long as the value of the house is within certain limits. The paperwork on these can be daunting, but we handle the application process for you. We even provide an online application.
A mortgage loan not insured by a government agency like the VA or FHA. Depending on the lender, conventional loans can be more expensive or about the same. What makes a mortgage conventional? Usually two things: you’re making at least a 5% down payment, and/or your mortgage is too big for the government to insure. The maximum size for FHA and VA mortgages usually changes yearly.
You want one of these if your situation allows. A conforming mortgage loan falls within the loan limits set by a government-sponsored agency – either Freddie Mac or Fannie Mae. The advantage of a conforming loan? You’ll generally get a cheaper interest rate.
Freddie Mac and Fannie Mae
Freddie Mac is short for Federal Home Loan Mortgage Corporation. Fannie Mae is short for Federal National Mortgage Corporation. They are private companies, chartered and subsidized by the federal government to provide lenders a source of funds to make mortgages. Freddie Mac and Fannie Mae set standards for mortgage loans, purchase mortgages, and resell an interest in them to investors. We’ll do our best to make sure your loan follows Freddie Mac/Fannie Mae guidelines. Mortgages that follow them are usually cheaper.
Non-conforming mortgage (also called a Jumbo loan)
A loan that exceeds the loan amount guidelines of either Fannie Mae or Freddie Mac. The amount varies. You pay a higher rate for a jumbo or non-conforming loan. And you’ll probably have to pay more than the normal five percent down.
A “point” (the singular use of the word) is simply one percent of any loan. A point may sound small, but can be so large. If you’re getting a $260,000 mortgage, a point is $2600.
The number of points charged varies with interest rates. The more points you agree to pay at a given lender, the lower the interest rate on the mortgage. That’s the reason points used like this are referred to as “discount points.” A lender might say “we’ll give you a 9% loan with no points, an 8.75% loan with one point, or an 8.50% loan with two points.” Of course, they aren’t giving you the points, you are giving them the points.
Virtually all lenders will charge you an origination fee. This is typically one point or 1% of the loan amount. This fee compensates the lender for the costs of processing and opening the loan. When most lenders advertise points with their rates, any origination fee points are included with the discount points. Make sure your lender does before you apply! Some lenders will only advertise the discount points to make their deal look better than it is. You could get an expensive 1% or higher surprise in your closing costs.
How do you know if you should take a lower rate, or pay the points? Generally speaking, if you plan to keep a loan for a long time, you are usually better off to take the lower rate and pay the points. If you’re planning to sell your home in the next five years or so, you’re better to take the higher rate. Mortgage interest is one of the few remaining tax deductions. Points when you buy a home are deductible the year you buy. Points you deduct when you refinance must be amortized or spread out over the life of the loan.
How do you know what’s best in your specific circumstance, higher rates or points?Ask us. Tell us your plans for the future, and we’ll recommend interest rate structure options that will probably be best for you.
An “assumable” mortgage means a person with approved credit can assume your mortgage (take over making your payments and responsibility for the loan) when you sell your home. This feature is a thing of the past thanks to the savings and loan debacle of the eighties. Assumable mortgages played a big role in the failure of savings institutions. The government and lending institutions have virtually done away with assumable loans.
Contingency clauses, contingencies
Read this carefully. Contingencies aren’t part of the mortgage itself, but are certainly part of the loan process. Contingencies are conditions that have to be met before a contract can be enforced. Say, for instance, you’re making an offer on a home, getting ready to write a check, but you’re not yet approved for a mortgage. You haven’t had a pest (insects and rodents) inspection done yet, and you want to make sure the home is in good structural condition. Being a smart buyer, you make the seller put clauses in the contract which say you don’t have to honor it (and do get your deposit back) if, for example:
- you can’t get approved for a mortgage;
- you can’t get the interest rate you were quoted;
- there are termites in the woodwork;
- there’s a high level of radon gas in the house.
Contingency clauses can also work in your favor if you’re a seller, of course. For instance, you might insert a clause in your contract saying any buyer must be able to close the sale within 90 days or the contract is void. Some contingencies are provided by law in certain states.
A survey is a check of the boundaries of a parcel of land property and the size and position of any permanent structures on the property. A full survey involves measurement of the property by a licensed surveyor using specialized measuring equipment to precisely locate property lines. The surveyor may also drive metal stakes in the ground at all corners to permanently mark the lines. Drawings are prepared from this process. Such a drawing when recorded with a government agency that maintains land records is called a plat. Surveys don’t tell you what a piece of property is worth.
The survey done at time of home purchase is not a full survey and may not be thorough enough to detect potential property line disputes. The surveyor typically makes a simplified copy of the recorded plat and does a quick visual check of the property. For more on this, read our page on surveys.
What a piece of property is worth. The only appraisal worth anything is called a Certified Appraisal. In many states, “Certified” means the appraiser is licensed. It also means the lender will accept the appraisal as the true value of a specific piece of property. Lenders typically have regular relationships with outside appraisers or have appraisers on staff.
The appraisal is important for a variety of reasons. The home buyer wants the appraisal to come in above the selling price. That indicates they negotiated a good deal and reduces the percentage of the value they’ll need to finance. A real estate agent will want the property to appraise at or above the selling price so it will not interfere with the sale. A home buyer may need to increase their down payment if the home appraises below the selling price or try to renegotiate the price with the seller. Lenders and investors who buy mortgages want a realistic appraisal to ensure sufficient collateral value in case of foreclosure.
There are two kinds. The first is before a sale. In this case, an escrow account is established by neutral third parties to hold money for a seller or buyer. Your down payment or earnest money can go into an escrow account. Some people call theseImpound Accounts.
The second type of escrow account occurs after the sale. If your down payment is less than 20% of the home’s value, your lender will typically require an escrow account. An amount will be added to your monthly payment to cover property taxes and property insurance. This amount goes into the escrow account. The lender will pay those bills on your behalf from that account. Escrow accounts typically pay interest or dividends on any balance.
A payment that shows you’re serious, and not just a “shopper.” This amount is credited to you at closing.
Another really important term for you to understand, if you are a borrower. We’re going to tell you about Adjustable Rate Mortgages in a minute, but first you need to understand the importance of “fully indexed rates.” The fully indexed rate is the true interest cost of an Adjustable Rate Mortgage.
Some mortgage lenders quote you a promotional interest rate to get your loan, but gloss over the fact that the “fully indexed” rate is dramatically higher.
Teaser rate, introductory rate
The “promotional” rate we just mentioned. These rates often deceive borrowers into thinking rates will stay low. Don’t pick a mortgage based on the teaser rate. The rate will go up.
Prorations, prorated fees
If the present owner has paid the property taxes or other fees for the year, but you’re closing on the house in the 8th month, you are generally responsible for reimbursing the seller back four months of those taxes and fees. Since you are assuming ownership of the property for the last four months of the year.
Some prorated fees, for example, charges for a home security service can be negotiable.
Fees the lender collects for processing a mortgage, plus title costs and prepaid items (taxes and insurance). Closing costs can vary wildly. They are almost always paid by the buyer, but sometimes sellers are willing to pick up some of the cost. This can be negotiated between buyer and seller. A caution: many real estate transactions regularly fall apart over the issue of who will pay closing costs. For instance, if you’re buying a very hot property, a seller may refuse to pay certain costs because the seller knows another buyer is in the wings. You have a perfect right to negotiate these costs, but make sure that negotiation doesn’t become a “deal breaker,” unless you intend it to be.
The day you’ve been waiting for! It’s the day you take ownership. At this point, we hope you’ll be thanking us for the good help of StreetWise for Homebuying and Mortgages.
Spend time learning these mortgage loan terms , and you’ll be smarter, wiser, and probably richer.
If you are ready to start researching mortgage rates, you can get a FREE rates quote from Capwest Mortgage.