Frequently Asked Questions
If there’s an opportunity to reduce the monthly rate on your mortgage, you should consider it. A good offer on a new mortgage rate would be one that is at least 2% lower than your current rate. Any reduction on your monthly mortgage payment can save you some cash each month. A 1% reduction on your rate can save you more than $50 a month.
Points are a simpler way of saying the percentage of the loan that needs to be repaid to the lender in order to meet the specified terms of your mortgage. A point is simply a percentage of the total loan amount. You may hear about discount points, which are fees that can be paid up front to lower the interest rate. Typically, one point equals 1% of the loan.
You should pay points for a discount to lower your required monthly payment. Doing so can also increase the amount you’re allowed to borrow. This is a good idea if you plan to stay at your current residence for several more years.
APR stands for annual percentage rate. What this boils down to is essentially the cost of your mortgage as a yearly rate. It’s the easiest metric to use to compare mortgages and the annual cost for each. The APR really is the true cost of a loan.
Generally included in the fees for APR are:
- Pre-paid interest
- Loan-processing fee
- Underwriting fee
- Document-preparation fee
- Private mortgage insurance
- Escrow fee
Locking in a loan’s interest rate will guarantee the rate will not change during a specified time period, such as 30 to 60 days. This will prevent a sharp increase in your interest rate and mortgage payment.
While each situation is different, the documents you will need if you plan to apply for a mortgage include:
- Pay stubs from the last year, including your most recent
- W-2 forms from the last two years
- Work visa or green card
- Copy of the signed sales contract
- Verification of the deposit on the home
- Names and contact information for all attorneys, realtors, builders, and insurance agents involved
- Copy of listing sheet
- Names and addresses of all employers over the last two years
- Copy of the signed sales contract on your current residence or listing agreement
- Copies of bank statements for the last three months
- Copies of statements or certificates from brokers for stocks and bonds
- A list of current debts with names, addresses, account numbers, balances, and monthly payments, including the last three monthly statements, as well as mortgage holders and/or landlords for the last two years
- Check for the application fee
Lenders follow a credit-scoring system that awards points for evidence that shows you are likely to repay a debt. Factors such as your bill-paying history, late payments, outstanding debt, collections, and the age and type of accounts you have will all play a part in your point total. Your score will then be compared to that of other consumers. What your score and the score of your counterparts will show is how likely you are to repay a loan.
The most widely used credit score is a FICO credit score, developed by Fair Isaac Company, Inc. These scores range between 350 (bad credit) and 850 (good credit).
While there’s no set formula that will guarantee the improvement of your credit score, taking steps like paying your bills on time, making sure the amount of debt you have doesn’t approach your credit limit, having a lengthy credit history, avoiding too many credit inquiries, and not having too many credit accounts can benefit your credit score.
Performed by a state-licensed professional, an appraisal is an estimate of your property’s value on the fair market. An appraisal is typically required before a loan is approved to ensure the loan you are receiving is not more than the true value of the property.
Private Mortgage Insurance protects lenders in cases where a borrower defaults on a conventional mortgage where the down payment is less than 20% of the purchase price of the home. You can avoid this added expense by making sure the down payment is at least 20%.
Since it can be hard to make the 20% down payment necessary to avoid having to pay PMI, many borrowers choose to go with 80-10-10 financing. How this works is that a bank or other institutional lender will provide a traditional 80% first mortgage, followed by a 10% second mortgage. That leaves behind 10% remaining on the home’s purchase price that will be covered by your down payment. By choosing this method, you can avoid paying for PMI. You can also elect to go with 80-15-5 financing.
Closing is when actual ownership of the property is transferred from the seller to the buyer. Closing happens at an official closing meeting where all the paperwork will be read and signed. Both the buyer and the seller will need to sign and attorneys for both parties, as well as the real estate agents involved, will need to be present. The final walkthrough will need to be completed immediately prior to closing. Once the check is in the seller’s hands and the keys are in the buyer’s hands, closing is complete.
Equity Direct Financial provides a checklist of steps for our clients to follow and complete before applying for a mortgage.
Your past credit payment history will go into compiling your current credit score. Your credit score, which can be improved, will go a long way to determining whether or not you’re eligible for a loan.
The final payment needed to close on your home is your closing cost. This is separate from a down payment and will result in the property officially being transferred from the seller to the buyer.
To ensure the loan amount is not more than the property value, a full estimate of the property’s value compared to similar properties will be done. This is called an appraisal, which is required by a lender before a loan can be approved.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance protects a lender from the potential risk associated with borrowers who cannot put at least 20% down on a new home purchase. Payment for this insurance will be an extra cost for buyers.
Many homeowners choose to refinance their home mortgage in order to lower their monthly payments and interest rates. If you can lower your mortgage rate by 2%, it’s a good idea for most homeowners.
A worst-case scenario for homeowners, foreclosure is when the home lender seizes a home because the buyer couldn’t keep up with mortgage payments or the terms of the mortgage contract.