Frequently Asked Questions

1.What is Pre-Approval?

Pre-approval simply means - Finding out how much money you can spend when you go to buy a home. Pre-approval takes place with the home loan consultant when he works with you at the beginning of the process. Once you have a contract and things begin to progress, your paperwork will go on to the loan processor and the underwriter. Once the underwriter gives his or her stamp of approval, then the loan is officially approved. But before you think you're done, there's still one more step: final approval. Even after the underwriter has reviewed your loan application and paperwork, there are still issues that could cause problems such as an unacceptable appraisal. The term we use when the loan is completely done is Clear to Close. At that point, all that's left is for you to sign your documents at closing.

2. What are the advantages of being pre-approved?

1. We can solve unforeseen issues such as errors on your credit report or questions about your income early on.
2. When you submit an offer on a home, the seller will take you more seriously if you've already met with a lender and the lender can provide a pre-approval letter.
3. If you need to close quickly, this is much more possible if you're already approved.
4. You and your realtor know where you stand and what price range you can look in.

3. What is the best payment for me?

Traditional guidelines say that your mortgage payment should be no more than 28% of your gross income or 36% of your income plus your consumer debt. These are what we call the debt-to-income ratios, and every lender considers them.

Examples: You have a salary of $48,000 per year, or $4,000 per month. Start with calculating 28% of $4,000, which is $1,120. Assuming you have no other consumer debt, such as car loans or credit card debt, your monthly payment should be no more than $1,120 according to these traditional guidelines. Say you do have consumer debt. Look at the second calculation, which would be 36% of your income to determine an estimated monthly payment. Go through the calculation with the same $4,000 per month. 36% of $4,000 is $1,440. In this example, let's say you have a $300 car payment as well as $150 per month in credit card payments. The next step would be to subtract the consumer debt, which would be $450 in this example from the $1,440. This would leave you with $990 for a mortgage payment. The key is that you would take the lesser of the two calculations, which would be $990. You can easily see from using these guidelines that the more consumer debt you have, the less house you can afford. Looser guidelines are now applied to loan approvals. With the majority of loans being approved through computer software today, loans are often approved with debt-to-income ratios of 60% or even higher. On the other end of the spectrum, financial talk-show host Dave Ramsey suggests to his listeners that a borrower should spend no more than 25% of their take home pay on a mortgage payment. Given these 3 approaches, you could choose to have a mortgage payment anywhere from $750 up to $1,750 per month.

4. What is my lender looking at?

There are three key areas: down payment, credit history, and income.

Down payment: Just like you are concerned about how much money you will need up front, this is a key area for the lender to look at as well, because to a large degree, your loan program will be determined by your down payment.

Credit history: Your home loan consultant will be looking at your credit scores from the three credit bureaus and will use these scores and your credit history as another major factor in getting you approved. Low credit scores can be caused by late payments, collections, or excessive debt.

Income and how much consumer debt you have in comparison to it. Regarding income, you may be paid in a number of ways: w-2, 1099, salary, hourly, bonuses, or self-employed. Just keep in mind that your lender will need to be able to verify your income and ideally would like to see a two-year track record in a job or career field.

NOTE: You need to be strong in at least two of the three areas in order to be able to acquire a good home loan. This means that if your credit scores are low, you need to have a good, steady income and a sizable down payment. If you don't have a down payment, you need to have that good income and great credit. And finally, if you can't verify your income easily, you'll want to have great credit scores and that sizable down payment. Being weak in two of the three areas may mean that the loan you qualify for is less than ideal or you may not be able to qualify at all.

5. What is included in my mortgage payment?

Unlike a rent payment, your mortgage payment can include four different components.

1. principle and the interest. The interest payment covers the interest being charged on your loan each month based on the amount borrowed and the interest rate. There will also be a portion of the basic mortgage payment going toward the actual principle of the loan. The payment amount going toward the principle starts out very small in the beginning of the term of your loan and grows each month until the loan is paid off. Of course, if you choose to start with a shorter term such as a 15 yr. fixed loan, more of your payment will go toward the principle from the very beginning. Your lender can provide you with an amortization schedule that shows the monthly breakdown of what part of your mortgage payment is going toward the principle and what goes toward the interest.

2. & 3. Real estate taxes and homeowners insurance are actually due annually. The majority of homeowners give the mortgage company 1/12th of these payments each month and then the lender pays the annual dues. These monthly payments are deposited into your Escrow account. Think of your escrow account as a safe where each of these small payments goes until they are due each year. At that point, the lender will empty the safe and make these payments on your behalf. In addition to what is due, your lender will likely keep two extra months of real estate taxes and homeowners insurance payments. This small cushion covers the lender in case you are behind with your payment and these fees come due. Also, it covers any increase in these charges. Please keep in mind that your real estate taxes and homeowners insurance fees are not fixed and can increase over time.

4. Your payment may include private mortgage insurance or PMI.

6. What is PMI?

Private mortgage insurance is a default insurance that protects the lender in the event that you default, or don't pay, on your home loan. PMI was created in order to make home loans available to those with very little money to put down and only applies to home loans that are greater than 80% of the purchase price of the home. In other words, if you put down 20% on a home purchase, you can avoid PMI. One other thing to mention about PMI, the more you put down, the lower the PMI will be. Putting down 15% versus 5% means that your PMI payment will be three times lower since the financial risk to the lender is lessened.

7. What is included in my closing costs?

Closing costs can be best understood if we break them down into three basic categories: discount points and origination fees, basic closing costs, and escrow items.

Discount points and origination fees: These are fees that represent 1% of the loan amount. If you are acquiring a $100,000 loan and your lender charges you an origination fee or discount point, this would be $1,000. For many lenders, it is a given that you will pay an origination fee. However, this should be an optional fee that you can choose. The discount points and origination fees are tied to the interest rate. The more of these fees you pay, the lower the interest rate will be. Now I know that you want to secure the lowest possible interest rate. However, you have to watch your up-front costs as well. Typically paying a 1% fee will lower the interest rate offered by .25%. For example, your lender may say that a 30-year fixed rate is available today at 6.5% with no points or origination fees. However, if you pay a 1% origination fee or $1,000 in our example, you can have a 6.25% rate. You can go a step forward and pay $2,000 to receive a 6.0% interest rate.

Basic closing costs: I like to break down basic closing costs into two groups: lender-related fees and third-party fees. The lender-related fees are charges such as an underwriting fee, a document preparation fee, and a processing fee. These are simply charges that allow the lender to cover some of their basic operational costs. A reasonable range for these fees would be $400-$700. The second group of basic closing costs would be third-party charges. The majority of fees you see on a Good Faith Estimate and a Settlement Statement are fees that other professionals are charging for their services. The lender is simply giving you a list of what those services will cost. These costs include appraisal fees, attorney fees, title charges, and government-related taxes. Keep in mind that your lender is not allowed to increase these fees above the actual charges. It's more difficult to give you a range for these fees since they can vary greatly depending on where you live and how your real estate contract is structured. Just to give you an average, I would expect a general $100,000 loan to carry third-party charges of about 1.5%, or $1,500.

Escrow or prepaid items: This will generally consist of four items. First, you will pay for the days of interest from the day you close until the end of the month. For example, if you close on the 15th of a month with 30 days, you will pay 15 days of interest at closing. Let me stop here and mention one wonderful surprise when you buy a home. Let's say you close on your home April 15th. While you will have to pay for 15 days of interest, you won't have your first mortgage payment till June 1st. The second item dealing with your escrow or prepaid items will be your first year's premium for homeowners insurance. Your final two items will be the cushion we talked about earlier for your real estate taxes and homeowners insurance escrow account. This is the safe we talked about earlier.

NOTE: Look at your Good Faith Estimate in light of these three categories, it will help you understand the many fees you're going to be paying at Closing. If you don't understand where a fee fits, ask your lender to explain which category of cost the fee fits in: the points or origination fees, the basic closing costs, or the escrow and prepaid items.