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Mortgage Information
Finding a Loan Officer:
Thinking about the mortgage process can be scary. It seems so complicated, with so many offers to choose from. So where do you start? With your Realtor®!
Your Realtor® is a professional who has established strong relationships with reputable mortgage companies as a result of years in the business. Your Realtor® is a knowledgeable resource working on your side. You can trust your Realtor® to recommend a good mortgage company because we share the same goal - a smooth and successful closing! Your Realtor® has guided many past clients through financial transactions. Why not let your Realtor® help you by providing the name of a mortgage company who has your best interests in mind?
There's no reason to waste your time calling toll-free numbers, or surfing the Internet to wade through the ever-changing "teaser" interest rates when your Realtor® knows a solid, competitive company. It saves time and gives you peace of mind.
Please refer me to a mortgage company.
The Mortgage Process:
Step 1
Set up a meeting with your loan officer to fill out the loan application. After you provide the required documents, a credit report will be ordered by the loan officer.
Step 2
Your application is processed. The title work (assuring that your new home has a legal title) and appraisal (determining property value) for your new home are ordered.
Step 3
Once the title work and appraisal of your new property are completed, these documents are added to your application file. All of your information is then sent to underwriting. This is where your application is approved, denied, or additional information is requested.
Step 4
Once approved for your loan, your information is forwarded to the closing department. Documents and instructions for closing the sale of your new property are prepared and sent to the title company handling your closing.
Step 5
The closing. Final documents are signed, funds are disbursed, payment (as spelled out in the terms of your mortgage loan) begin.
Types of Mortgages:
Adjustable Rate Mortgage (ARM)- A home loan in which the interest rate is changed periodically based on a standard financial index. Most ARMs have a Cap (limit) on how much the interest rate may increase. The caps protect you from drastic market changes, but ARMs don't offer the stability of a fixed rate loan. ARMs could be a good choice for someone who knows his or her income will rise and at least keep pace with the loan rate's periodic adjustment cap. If you plan to move in a few years and are not concerned about the possibility of a higher rate, and ARM also could be a good choice.
An ARM's rate is based on a money market index. The one-year U.S. Treasury bill is commonly used. To come up with the ARM rate, the lender will add a "margin", usually two to four percentage points, to the index.
Balloon mortgage: A home loan which is payable in full after a period that is shorter than the term of the loan, with typical terms being 5, 7, or 10 years. On a 7 year balloon for example, the payment is calculated over a 30-year period but the balance due on the loan after 7 years, must be either paid off or refinanced.
Balloon mortgages are similar to ARMs in that the interest rate is not fixed. Borrowers run the risk of higher interest rates at the end of the balloon period.
Biweekly mortgage- A mortgage on which the borrower makes half of the monthly loan payment twice in a month. This works out to 26 payments in a year, rather that the typical 24 and the loan is paid off more quickly.
Conventional Mortgage: With a conventional mortgage, the lender obtains a lien on the property in return for the payment of the amount the loan. A home loan that is not guaranteed by the VA (Veterans Administration) of insured by the FHA (Federal Housing Administration).
FHA Mortgage- An FHA mortgage is a conventional mortgage which is insured (against loss) in whole or in part by the Federal Housing Authority. The borrower pays the mortgage insurance premium. Typically the down payment for an FHA mortgage is low but the amount that can be borrowed is also low.
Home Equity Loan- A mortgage on the borrower's principal residence, usually for the purpose of making home improvements or debt consolidation.
Home Equity Line of Credit (HELOC)- A mortgage set up as a line of credit, from which a borrower can draw, up to a maximum amount. Money can be drawn from the line by writing a check, using a credit card or other forms of withdrawing money.
Interest Only Mortgage- The scheduled monthly mortgage payment consists of interest only and no part of the payment goes toward principal, so the loan balance will remain un-changed. The option to pay interest only only lasts for a specified time period, usually 5 to 10 years. This type of loan is flexible in that, borrowers have the option of paying more than just the interest only payment (paying toward principal).
LIBOR Mortgage- A LIBOR mortgage is an adjustable rate mortgage on which the interest rate is tied to the London InterBank Offered Rate. This s the interest rate offered for U.S. dollar deposits by a group of London banks. There are different types of LIBORS depending on the length of maturity of the deposit made to the London banks.
VA mortgage- (Veterans Administrations mortgage)- A mortgage only to ex-servicemen and women. No down payment is required and the lender is insured against loss by the Veterans Administration.
Purchase money mortgage- A purchase money mortgage is one that is given to secure the loan which is used to buy the property. A first (senior) mortgage on the property has priority over any second (junior) mortgages.
Reverse Mortgages:
Typically for seniors, reverse mortgages are becoming popular in America. Reverse mortgages are a special type of home loan that lets a homeowner convert the equity in his/her home into cash. They can give older Americans greater financial security to supplement social security, meet unexpected medical expenses, make home improvements and more.
Glossary:
| A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |Acceleration Clause - A provision in a contract that gives the lender the right to demand repayment of the balance of the loan, in the event that the borrower violates one or more clauses in the note.
Accrued Interest - Interest that is earned but not paid, added to the amount owed on the loan.
Adjustable Rate Mortgage (ARM) - A mortgage loan subject to changes in interest rates. When rates change, ARM monthly payments increase or decrease at intervals determined by the lender. The change in the payment amount is usually subject to a cap (maximum amount of the interest rate change).
Amortization - Repayment of a mortgage loan through monthly installments of principal and interest. The monthly payment amount is based on a schedule (amortization schedule) that will allow the borrower to own the property at the end of a specific time period.
Application - The first step in the official loan approval process The application form records important information about the borrower necessary to the underwriting process. There may be an application fee.
Appraisal - A written estimate of the current market value of a property, prepared by a qualified appraiser.
Appraiser - A qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.
Approval Letter - A letter prepared by the lender stating that the borrower has met the qualification requirements for the loan. The approval letter may be conditional on further verification of information.
APR or Annual Percentage Rate - The APR shows the cost of a loan; expressed as a yearly interest rate. It includes the interest, points, mortgage insurance and other fees associated with the loan.
ARM - See Adjustable Rate Mortgage.
Assumable Mortgage - A mortgage that can be transferred from a seller to a buyer. Once the loan is assumed by the buyer, the seller is no longer responsible for repaying it. There may be a fee and/or a credit package involved in the transfer of an assumable mortgage.
Balance - The amount of the original loan remaining to be paid.
Balloon - The loan balance remaining at the time the loan contract calls for a full repayment.
Balloon Mortgage - A mortgage which is payable in full after a period of time that is shorter than the term, usually 5, 7, or 10 years. After that time period elapses, the balance is due or is refinanced by the borrower.
Bankruptcy - A federal law whereby a person's assets are turned over to a trustee and used to pay off outstanding debts. This usually occurs when someone owes more than they have the ability to repay.
Bimonthly Mortgage - A mortgage on which the borrower pays half the monthly payment on the 1st of the month and the other half of the payment on the 15th of the month.
Biweekly Mortgage - A mortgage on which the borrower pays half the monthly payment every 2 weeks. This results in 26 payments per year (rather than 24, as in bimonthly), and the loan is paid off before term.
Bridge Loan - A short-term loan that can "bridge" the period between buying and selling of homes. The borrower must have a contract to sell the home in order to qualify for a bridge loan.
Buy-Down - The payment of points in exchange for a lower interest rate. See Points.
Buy-Up - The borrower pays a higher interest rate in exchange for money back from the lender, reducing up-front costs.
Cap - A limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.
Cash-Out Refinance - The borrower refinances for an amount greater that the balance of the loan, to take "cash out" of the transaction.
Closing - Also known as settlement, this is the time at which the property is legally transferred from the seller to the buyer. At this time, the borrower takes on the loan obligation, pays closing costs and receives title to the property from the seller.
Closing Costs - Customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing. These costs can vary and are spelled out to the borrower after submitting a loan application.
COFI or Cost of Funds Index - An interest rate index used to determine interest rate adjustments on an adjustable rate mortgage.
Condominium - A form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex. The owner also shares financial responsibility for common areas shared by all owners.
Contract for Deed - A contract in which a property title is transferred but only after buyer makes a certain number of payments. Also called contract sale.
Conventional Mortgage - A private sector loan, not guaranteed or insured by the U.S. government (FHA or VA).
Cooperative or Co-op - Residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.
COSI or Cost of Savings Index - Used to determine interest rate adjustments on an adjustable rate mortgage.
Co-Signing a Note - Signing a note and thereby assuming responsibility for the mortgage loan, if that borrower is unable to pay.
Credit Report - A record that lists all past and present debts and the timeliness of their repayment. The report documents an individual's credit history.
Credit Score - A number representing the possibility a borrower may default. It is based upon credit history and is used to determine ability to qualify for a mortgage loan.
Cumulative Interest - The sum of all interest payments to date or over the life of the loan.
Debt-to-Income Ratio - A comparison of gross income to housing and non-housing expenses. For FHA loans, the monthly mortgage payment should be no more than 29% of the monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.
Default - The inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.
Delinquency - Failure of a borrower to make a mortgage payment. A mortgage payment that is more than 30 days late.
Demand Clause - A lender can demand repayment of the loan at any time and for any reason. This clause is written in the mortgage note.
Down Payment - The portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.
Due-on-Sale Clause - A provision of a loan contract that state that if the property is sold, the balance of the loan must be repaid.
Earnest Money - Money put down by a potential buyer to show seriousness about purchasing the home. It becomes part of the down payment if the offer is accepted and returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.
Effective rate -
Energy Efficient Mortgage or EEM - An FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase.
Equity - The difference between the value of the home and the balance of outstanding mortgage loans on the home.
Escrow - Money (or valuable items) are placed with a third party for safekeeping, pending the performance of the contract or promise.
Fair Housing Act - A law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability.
Fair Market Value - The hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully and with complete knowledge of the situation.
Fannie Mae - Nickname for the Federal National Mortgage Association (FNMA), a federally chartered enterprise, owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors. By purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.
FHA or Federal Housing Administration - Federal administration established to advance homeownership opportunities for all Americans by providing mortgage insurance to lenders to cover most losses that occur when a borrower defaults. This encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
Fixed-Rate Mortgage - A mortgage with payments that remain the same throughout the life of the loan. Interest rate and other terms are fixed.
Flexible Payment ARM - An adjustable rate mortgage on which the interest rate is adjusted monthly. There is a low initial minimum payment that rises by 7.5% a year for 5 years but carries a risk of larger payment increases. Also called an "Option ARM."
Float - The rate and points vary with the changes in market conditions, can be risky.
Foreclosure - A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
Freddie Mac - Nickname for the Federal Home Loan Mortgage Corporation (FHLM), a federally-chartered corporation that purchases residential mortgages, secures them and sells them to investors; this provides lenders with funds for new homebuyers.
Ginnie Mae - Nickname for the Government National Mortgage Association (GNMA), a government owned corporation overseen by the U.S. Department of Housing and Urban Development. Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment. As with Fannie Mae and Freddie Mac, the investment income provides funding that may be lent to eligible borrowers.
Good Faith Estimate - An estimate of all closing fees, including pre-paid and escrow items as well as lender charges. The estimate must be given to the borrower within three days after submission of a loan application.
Graduated Payment Mortgage or GPM - A mortgage on which the payment increases by a constant percent for a specified time. It then levels out over the remainder of the term and is fully amortized.
HELP or Homebuyer Education Learning Program - An educational program from the FHA that counsels people about the home buying process.
Home Equity Loan - Also called a "second mortgage," this is a loan that uses the equity in a home as collateral. It is often used as a way of consolidating other debt. Interest on a home equity loan is deductible.
Homebuyer Protection Plan - A plan that is supposed to protect FHA homebuyers against property defects.
HUD or U.S. Department of Housing and Urban Development - Established in 1965, HUD works to create a decent home and suitable living environment for all Americans by addressing housing needs, improving and developing American communities and enforcing fair housing laws.
HUD1 Statement - Also known as the "settlement sheet," the statement itemizes all closing costs and must be given to the borrower at or before closing.
HVAC - Heating, Ventilation and Air Conditioning.
Index - A measurement used by lenders to determine changes to the interest rage charged on an adjustable rate mortgage.
Insured Conventional Mortgage - A mortgage insured by a private lender where, in exchange for a higher interest rate, the mortgage insurance premium is paid by the lender.
Interest - A fee charged for the use of money.
Interest Accrual Period - The period over which the interest due is calculated.
Interest Cost- A time-adjusted measure of cost to the borrower for the mortgage.
Interest-Only Mortgage - A mortgage where the monthly mortgage payment consists of interest only and during the interest-only payment period, the loan balance remains unchanged.
Interest Rate - The rate charged to the borrower each period for the loan of money.
Interest Rate Ceiling - The highest interest rate possible under an adjustable rate mortgage contract. Sometimes called a "cap."
Interest Rate Floor - The lowest rate possible under an adjustable rate mortgage contract.
Joint Tenancy - Joint ownership by two or more persons with right of survivorship; all own equal interest and have equal rights to the property. Compare with Tenancy in Common.
Jumbo Mortgage - A mortgage amount larger than maximum allowed by Fannie Mae and Freddie Mac ($333,700 in 2004). "Jumbo" is also a term used to refer to a loan larger than $500,000.
Lease Purchase or Lease-to-Own - Assists low to moderate income homebuyers by allowing them to lease a home with an option to buy. The rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.
LIBOR or London InterBank Offered Rate - an index used in determining the interest rate on an ARM.
Lien - A legal claim against property that must be satisfied when the property is sold.
Loan-to-Value Ratio or LTV Ratio - A percentage calculated by dividing the amount borrowed by the price (or appraised value) of a home to be purchased. The higher the LTV, the less cash a borrower is required to pay as a down payment.
Lock-In - Since interest rates fluctuate, lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed by a certain date.
Low Documentation or "Low Doc" Loan - Income and asset information is still required, but it isn't fully verified as in a full documentation loan.
Manufactured Housing - A house built in a factory, move to and then installed at a site.
Margin - An amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.
MIP - See Mortgage Insurance Premium.
Mortgage - A lien on the property that secures the promise to repay a loan.
Mortgagee - The lending institution.
Mortgagor - The borrower(s) taking out a mortgage.
Mortgage Banker - A company that originates loans and resells them to secondary mortgage lender like Fannie Mae or Freddie Mac.
Mortgage Broker - An independent contractor who originates and processes loans for a number of lenders (wholesalers).
Mortgage Insurance - Insurance against loss provided to a lender in the event of borrower's default. The borrower typically pays the premiums. Mortgage insurance is required primarily when the down payment is less than 20% of the purchase price.
Mortgage Insurance Premium or MIP - A monthly payment (usually part of the mortgage payment) paid by a borrower for mortgage insurance.
"No Doc" or No Documentation Loan - Loans that waive one or more elements of documentation normally required.
Note - A legal contract that produces evidence of a debt and a promise to repay the loan.
Offer - An indication by a potential buyer of a willingness to purchase a home at a specific price, generally put forth in writing.
Option ARM - See Flexible Payment ARM.
Origination - The process of preparing, submitting and evaluating a loan application. The process generally includes a credit check, verification of employment and an appraisal of the property to be purchased.
Origination Fee - The charge for originating a loan. The fee is usually calculated in the form of points and paid at closing.
Payment Adjustment Interval - The period between payment changes on an ARM. (This may or may not be the same as the interest rate adjustment period.)
Payment Decrease Cap - The maximum percentage decrease in the payment on an ARM at a payment adjustment date.
Payment Increase Cap - The maximum percentage increase in the payment on an ARM at a payment adjustment date. A 7.5% cap is fairly common.
Per Diem Interest - Interest from the day of closing to the first day of the following month.
Pick a Payment ARM - See Flexible Payment ARM.
PITI or Principal, Interest, Taxes and Insurance - The four elements of a monthly mortgage payment. Payments of principal and interest go directly toward repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage insurance, if applicable) goes into an escrow account to cover the fees when they are due.
PMI or Private Mortgage Insurance - Privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of the purchase price.
Points - A point is one percent of the amount of the mortgage loan. Points are paid in order to lower an interest rate on a mortgage. The more points paid, the lower the interest rate. On FHA and VA loans, only the seller may pay points.
Pre-Approval - A lender commits to lend to a potential borrower in advance. A commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
Pre-Foreclosure Sale - A sale that allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.
Premium - An amount paid on a regular schedule by a policyholder who maintains insurance coverage.
Prepayment - Payment of the mortgage loan before the scheduled due date (may be subject to a prepayment penalty).
Pre-Qualification - A lender informally determines the maximum amount an individual is eligible to borrow.
Principal - The portion of the monthly payment that is used to reduce the loan balance.
Real Estate Agent - An individual who is licensed to negotiate and arrange real estate sales (real estate salesperson), and works for a real estate broker.
Realtor® - A real estate agent or broker who is a member of the National Association of Realtors&174; and its local and state associations.
Refinancing - Paying off one loan by obtaining another. Refinancing is generally done to secure better loan terms (lower interest rate).
Rehabilitation Mortgage - A mortgage that covers the costs of rehabilitating (repairing or improving) a property. Some rehabilitation mortgages allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.
RESPA or Real Estate Settlement Procedures Act - A law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices and relationships.
Reverse Mortgage - A loan to an elderly home owner on which the balance rises over time and which is not repaid until the owner dies or sells the home.
Right of Rescission - When refinancing, the right of borrowers to cancel the deal with no financial penalty, within 3 days of closing.
Second Mortgage - A loan with a second priority claim against a property. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid. Can also be know as a Home Equity Loan.
Secondary markets - Markets in which mortgages or mortgage-backed securities are bought and sold.
Settlement - See Closing.
Silent Second Mortgage - A second mortgage offered at subsidized terms to those who qualify.
Simple Interest Mortgage - A mortgage on which interest is calculated daily based on the balance at the time of the last payment.
Special Forbearance - A loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.
Stated Income - A documentation where the lender verifies the source of the income but not the amount.
Subordination - To place in a rank of lesser importance. One mortgage can be subordinated to another.
Subordination Policy - The second mortgage lender allows for a borrower to refinance the first mortgage while leaving the second mortgage in place.
Sub-Prime Borrower - A borrower with poor credit.
Sub-Prime Lender - A lender who specializes in lending to sub-prime borrowers.
Survey - A property diagram created by a surveyor that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.
Sweat Equity - Using labor to build or improve a property as part of the down payment.
Swing loan - See Bridge Loan.
Tenancy in Common or Tenants in Common - Ownership by two or more persons who hold undivided interest, without right of survivorship. Interests need not be equal.
Title 1 - An FHA-insured loan that allows a borrower to make non-luxury improvements (renovations or repairs) to the home. Title 1 loans for less than $7,500 do not require a property lien.
TIL or Truth in Lending - The Federal law that specifies the information that must be provided to borrowers on different type of loans.
Title Insurance - Insurance that protects the lender against any claims arising from arguments about ownership of the property. Title insurance is also available for homebuyers.
Underwriting - The process of analyzing a loan application to determine the amount of risk involved in making the loan. Underwriting includes a review of the potential borrower's credit history and a judgment of the property value.
VA - The Department of Veterans Affairs, a federal agency which guarantees loans made to veterans. Similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.
Wrap-Around Mortgage - A mortgage on a property that already has a mortgage, where the new lender assumes the payment obligation on the old mortgage.
Staying on Top of Your Credit:
Why Credit Matters
Everyone needs to borrow money at some time, and it's especially critical when buying property. Your ability to borrow, and do so at a competitive interest rate, depends on your credit history. Your financial transactions are constantly being monitored by credit bureaus who maintain your credit report. Do you pay your bills on time? What are your credit card balances? Answers to these questions are summed up in reports that lenders use to decide whether to loan you money. Lenders need these tools to predict how risky you are as a borrower. For the convenience of lenders, your creditworthiness is often boiled down to a three-digit number! Awareness of your credit history, understanding how it's created, who maintains it, and how your actions influence it, all of this is vital to your financial well-being.
So before applying for a mortgage, find out what others are saying about you. They've got your number and you should too! Take control of your finances and make sure your credit history is accurate and not standing in the way of your goals.
Your Credit Report
Your credit report summarizes your creditworthiness by listing your debts and payment history. Three consumer credit bureaus independently maintain your credit history by collecting data from banks and creditors. Each bureau creates its own report, so unfortunately, you need to monitor all three. The bureaus are TransUnion, Experian and Equifax. You can visit their websites for more information:
www.experian.com
www.transunion.com
www.equifax.com
Obtain Your Free Credit Reports
Because monitoring your credit is so important, the government passed a law enabling you to access free copies of your credit reports from all three bureaus once every twelve months. Just go to www.annualcreditreport.com and rest assured that the site is secure and confidential. Print copies of your reports and review them for accuracy.
Answers to frequently asked questions about credit reports are available from the government at http://www.ftc.gov/bcp/conline/pubs/credit/freereports.htm.
Beware of ads offering free credit reports. There are usually strings attached or hidden fees. Use the government-sponsored website and you'll be assured that it's truly free.
As you review each report, pay attention to the following:
- Check for errors in name, address, Social Security Number, zip code, all the small details
- Accounts should not appear twice, even in separate sections
- Which accounts are marked "Open" versus "Closed"? Accounts you closed should be marked "Closed By Consumer." Otherwise, it might be assumed that the account was closed by a creditor, and that's a mark against you
- Highlight any data marked "past due" and verify its accuracy
- Check all data regarding debt balances, late payments, joint versus single accounts, credit limits, etc.
- Question any items that you don't recognize
- Negative information more than 7 years old (or a bankruptcy more than 10 years old) should generally not appear on the report
- Is there information missing that would help your credit history?
The "Account Profile" section on the report contains a summary rating for each account: "Positive," "Negative" and "Non-rated." "Non-rated" means that you've had a few late payments. Make sure all these ratings are accurate.
If You Discover Errors
Under the Fair Credit Reporting Act (FCRA), you have the right to challenge all inaccurate, misleading or incomplete items on your credit report.
You must put your disputes in writing and the credit bureau must investigate each one, usually within 30 days. In your letter, be sure to state that you are disputing your data, and mail it to the correct address, since some bureaus have specific address for disputes. You'll find various dispute letter templates on the Internet, which can save you time.
Information found to be inaccurate, incomplete or unverifiable must be removed by the credit bureau. When the investigation is done, the bureau must give you the written results and a free copy of your credit report, if the dispute results in a change on your report.
Your Credit Score
Your score is a number, and a higher score means better credit. The number is derived using a complex mathematical model. It summarizes in three digits your credit risk - that is, the likelihood that you will make timely payments to repay what you borrowed. Each of the three credit bureaus scores credit differently. Equifax, for example, provides what they call a "FICO" score ranging from 300-850. (For more information, go to www.myfico.com.) The median FICO score in the US is 723 (as of April 2005). There is no single "cut-off" score used by lenders to deny credit. Each lender uses the score differently in its decision making, taking many factors into account.
Generally, you can't get your credit score for free, although some mortgage lenders will provide it to you during the financing process. You can purchase it from one of the three credit bureaus (even at the same time you download your reports from www.annualcreditreport.com). Expect to pay about fifteen dollars.
- Payment History - Weight: 35% -- To boost score: pay bills on time
- Amounts Owed - Weight: 30% -- To boost score: pay down revolving credit (e.g. credit cards)
- Length Of History - Weight: 15% -- To boost score: maintain accounts for a long time (your average is what counts). If you need to close an account, close the newest accounts first
- New Credit - Weight: 10% -- To boost score: don't open several new credit accounts in a short time period
- Types of Credit (Credit Mix) - Weight: 10% -- To boost score: maintain a variety of types of accounts (retail accounts, installment loans, mortgages)
Repairing Your Credit
First of all, beware of companies claiming they can repair your credit for you, for a fee. These "credit clinics" generally can't do anything for you that you can't do yourself.
You have various options depending on the circumstance, but generally you'll need to send certified letters and call creditors to persuade them to modify or delete the information they've submitted (or will submit) to the credit bureaus. For late payment history, write to the creditor and give specific reasons why payments were late. Wait 30 days for a response, and follow up with a phone call if there's been no response or no change to your credit report.
For current bad debts, contact your creditors directly (as opposed to a collection agency) and negotiate repayment plans. Suggest a payment plan in exchange for a corrected entry on your credit report. Explain the payment plan in a letter and be sure to make good on your promises.
Lastly, if your overall credit is poor or you've had a bankruptcy, write a statement (100 words or fewer) to the credit bureaus stating the reasons. Provide specific, understandable reasons, not excuses. Demand that your statement will be included in any credit report provided to potential lenders, since that is your legal right.
Identity Theft
Identity theft is one of the fastest-growing crimes in America. To avoid being a victim, monitor your credit reports as frequently as possible. For a small fee, you can buy identity theft safeguard services from one of the three credit bureaus. Mark your calendar to obtain your free reports every twelve months, and make a habit of reviewing them. Your financial future may depend on it.
Tips to Remember
Here are some final words to the credit wise:
- Pay bills on time, because late payments can have long-lasting consequences
- If you've missed payments, get current and stay current
- Apply for and open new credit accounts only when necessary
- Keep balances low on credit cards
- Pay off debt rather than moving it between credit cards
Choosing the Right Mortgage:
Choosing a mortgage is a major decision and many factors determine which is best for you. Here are the main factors you'll have to consider:
- Your Income And Financial Status
- How Long You Plan To Keep The Home
- Your Risk Tolerance
- Your Lifestyle
Mortgages come in many variations and sorting through the choices can be complicated. Loan selection is broad and differs by:
- Who Guarantees The Loan
- Interest Rate
- Term
- Loan Structure
- Documentation Requirements
As you read about each type of mortgage you can move your mouse over any under-lined term to see the definition from our Glossary.
WHO GUARANTEES THE LOAN
Government-Backed Mortgages - Do You Qualify?
Some mortgages are guaranteed ("backed") by government agencies. If you qualify for an FHA or a VA mortgage, they can offer easy qualification requirements and low (or no) down payments. If you don't qualify, then you can apply for a conventional loan.
FHA Mortgage
The down payment for an FHA MortgageFHA (Federal Housing Administration) Mortgage - The FHA is the federal administration established to advance homeownership opportunities for all Americans. An FHA mortgage is insured by the FHA and is popular for first-time buyers. is low but the amount that can be borrowed is also low. For 2005, the maximum loan amount is $221,160 or less (for Hennepin, Ramsey and Dakota Counties). The minimum down payment is only 3%. Closing costsClosing Costs - Customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing. These costs can vary and are spelled out to the borrower after submitting a loan application. can be included in the loan amount, too. You can get a fixed rateFixed-Rate Mortgage - A mortgage with payments that remain the same throughout the life of the loan. Interest rate and other terms are fixed. or adjustable rateAdjustable Rate Mortgage (ARM) - A mortgage loan subject to changes in interest rates. When rates change, ARM monthly payments increase or decrease at intervals determined by the lender. The change in the payment amount is usually subject to a cap (maximum amount of the interest rate change). FHA mortgage. Mortgage insurance premiums are required, and you'll be charged both an up-front premium and an annual premium.
- Best When - You can only afford a small down payment. Good for first-time buyers
- Advantages - Down payment is low and interest rates are competitive
- Disadvantages - The maximum loan amount is $221,160 in Hennepin, Ramsey or Dakota County (for 2005)
VA Mortgage
A VA MortgageVA - A VA mortgage is guaranteed by The Department of Veterans Affairs, a federal agency. To qualify for a VA mortgage, you must be currently serving or have formerly served in a branch of the US military.
is available only to active or former servicemen and women. No down payment is required, but you will be charged an up-front mortgage insurance premium at the time of closingClosing - Also known as settlement, this is the time at which the property is legally transferred from the seller to the buyer. At this time, the borrower takes on the loan obligation, pays closing costs and receives title to the property from the seller.. You can get a fixed or adjustable VA loan.
- Requirement - You must meet qualifications regarding military service
- Advantages - No down payment required, and interest rate is competitive
- Disadvantages - The maximum loan amount with no down payment is $359,650 (2005)
Conventional Mortgage
If you have at least 20% to put down on a home, you might consider a Conventional MortgageConventional Mortgage - A private sector loan, not guaranteed or insured by the U.S. government (FHA or VA).. With 20% down, mortgage insuranceMortgage Insurance - Insurance against loss provided to a lender in the event of borrower's default. The borrower typically pays the premiums. Mortgage insurance is required primarily when the down payment is less than 20% of the purchase price. is not required.
- Best When - You can put 20% or more down
- Advantages - You save money by eliminating mortgage insurance
- Disadvantages - Your loan may be sold from one lender to another
Another option is the Insured Conventional MortgageInsured Conventional Mortgage - A mortgage insured by a private lender where, in exchange for a higher interest rate, the mortgage insurance premium is paid by the lender.. If you cannot put 20% down but still want to avoid paying mortgage insuranceMortgage Insurance - Insurance against loss provided to a lender in the event of borrower's default. The borrower typically pays the premiums. Mortgage insurance is required primarily when the down payment is less than 20% of the purchase price., some lenders will offer a higher interest rate on the loan in exchange for paying the mortgage insurance. So you need to weigh the ultimate cost of the higher interest rate against the savings gained by avoiding mortgage insurance premiums.
- Advantages - Interest payments are tax-deductible, whereas insurance premiums are not
- Disadvantages - You pay more interest for the life of the loan, whereas mortgage insurance will end when equity reaches 80%
Jumbo Mortgage
If your loan amount exceeds the FHA or VA limits (mandated by law), then your mortgage is called a Jumbo MortgageJumbo Mortgage - A mortgage with a loan amount larger than the maximum set by Fannie Mae and Freddie Mac ($359,650 in 2005). Also, the term "Jumbo" is sometimes used to refer to mortgage with a loan amount greater than $500,000.. This term is also used generally to mean mortgage loans for more than $500,000. Jumbo mortgages can also be called "non-conforming mortgages," although this term is also used to describe mortgages where credit is poor or documentation is inadequate.
A jumbo mortgage has a loan amount above conventional loan limits. Currently, FNMA and FHLMC will set a limit on the loan amount that they will purchase from an individual lender. This amount in 2005 is $359,650. Borrowers seeking loans of $500,000 an up, must turn to other lending sources such as banks and insurance companies. Jumbo loans can go up to $10 million but standard is $359,000-$650,000.
- Advantages - You obtain the large loan amount that you need
- Disadvantages - The interest rate is higher because jumbo mortgages are less common
LEVELS OF DOCUMENTATION
Various levels of documentation are required when applying for a mortgage, and these vary by lending institution. If you can supply full documentation, you'll be viewed as a solid borrower, which will help you get the best interest rate.
Full Documentation Mortgages
With full documentation mortgages, income and assets are disclosed by you and verified by the lender.
- Advantages - Your chances for a low interest rates and low down payment are optimized (because this is the safest type of documentation for the lender)
Low Documentation ("Low Doc") Mortgages
With low documentation mortgages, the documentation requirements are loosened, but you still have to provide information about income and assets.
- Stated Income / Stated Assets: When your source of income is verified, but the actual amount is not, and you state your assets, but they are not verified
- Stated Income / Verified Assets: When your source of income is verified, but the actual amount is not. Assets are verified and must meet certain verification standards
No Documentation ("No Doc") Mortgages
If you are unable to provide full documentation, check into the "No Doc""No Doc" or No Documentation Loan - Loans that waive one or more elements of documentation normally required. mortgage. These loans waive one or more of the requirements, and are typically adjustable rate mortgages. For No Doc loans, you'll need a credit score above 680 (although some programs permit scores as low as 660). If you are not a US citizen, a No Doc loan can allow you to obtain a mortgage, provided you meet the credit score threshold.
- No Ratio: When income is disclosed and verified, it the data is not used in qualifying for the mortgage
- No Income: When income is not disclosed but assets must meet verification standards
- No Asset: When your assets are not disclosed but your income is used for qualification
- No Income / No Asset (NINA): When neither your income nor your assets are disclosed. Approval for this type of loan is based on down payment, credit history and the value of the property and requires documentation of employment of the last two years
- Advantages (of Low Doc and No Doc) - If you can't meet full documentations requirements, you can still get a mortgage
- Disadvantages (of Low Doc and No Doc) - Because more risk is assumed by the lender, interest rates may be higher and a greater down payment may be required
INTEREST RATE
Fixed-Rate Mortgage
The term of a Fixed-Rate MortgageFixed-Rate Mortgage - A mortgage with payments that remain the same throughout the life of the loan. Interest rate and other terms are fixed. is traditionally 15 or 30 years. Interest rates are fixed, and so is the monthly payment.
- Best When - Your risk tolerance is low
- Advantages - Predictable payment schedule
- Disadvantages - Rates not as low as with ARMs
Adjustable Rate Mortgage
Usually, an Adjustable Rate Mortgage (or "ARM")Adjustable Rate Mortgage (ARM) - A mortgage loan subject to changes in interest rates. When rates change, ARM monthly payments increase or decrease at intervals determined by the lender. The change in the payment amount is usually subject to a cap (maximum amount of the interest rate change). has a limit (cap) on how much the rate may increase. The cap protects you from drastic market changes, but ARMs don't offer the stability of a fixed rate loan.
ARMs are a good choice for people who predict a rise in their income to keep pace with the loan rate's periodic fluctuations. If you plan to move in a few years and are not concerned about the possibility of a higher rate, an ARM also could be a good choice.
An ARM's rate is based on a money market index. A very common index is the one-year U.S. Treasury bill (called a T-Bill). To come up with the ARM interest rate, the lender will add a "margin," usually two to four percent, to the index.
The first number in the ARM is the number of years that the annual percentage rate is fixed. The second number is the number of times the annual percentage rate can change during a one-year period. For example a "3 to 1 ARM" or "3/1 ARM" has a fixed rate for the initial term of 3 years, but thereafter, the annual percentage rate may change only once per year.
Another index is the London InterBank Offered Rate (LIBOR)LIBOR or London InterBank Offered Rate - an index used in determining the interest rate on an ARM.. This interest rate is offered for U.S. dollar deposits by a group of London banks. LIBOR mortgages differ depending on the length of maturity of the deposit made to the London banks.
- Best When - You are tolerant of fluctuations in your monthly payment in order to get a lower interest rate at the outset. Also good if you plan to sell the home in a few years
- Advantages - Low interest rates
- Disadvantages - Interest rate fluctuates, making planning harder
You can sometimes pay pointsPoints - A point is one percent of the amount of the mortgage loan. Points are paid in order to lower an interest rate on a mortgage. The more points paid, the lower the interest rate. On FHA and VA loans, only the seller may pay points. to get a lower interest rate. A point is one percent of the amount of the mortgage loan. On FHA and FA loans, buyers are prohibited from paying points, although a seller can. On a conventional mortgage, points may be paid by either buyer or seller or split between them.
TERM
The term is the length of the mortgage. Payments are due according to an amortizationAmortization - Repayment of a mortgage loan through monthly installments of principal and interest. The monthly payment amount is based on a schedule (amortization schedule) that will allow the borrower to own the property at the end of a specific time period. schedule, which incorporates (1) the term, (2) the interest rate, and (3) the frequency of payment. By manipulating any one of these three factors, the dollar amount of the payment will change.
30-Year Term. With a 30-year term, monthly payments are lower than on a 15-year mortgage because the payments are spread over a longer period. However, interest rates are higher than on a 15-year loan, and equity is built at a slower pace because payments during the early years go largely toward interest, not principal.
- Best When - You plan to keep your home a long time
- Advantages - If interest rates are low, you lock in a low rate for 30 years
- Disadvantages - You build equity very slowly in the early years
15-Year Term. With a 15-year term, monthly payments can be significantly higher than on a 30-year loan. As you can see from the chart below, the total interest paid is less than half that paid on a 30-year loan, but the monthly payment is only about 35% higher. Interest rates are usually lower than on a 30-year loan, they are the same in the chart so you can compare.
- Best When - You can afford a higher monthly payment (than on a 30-year term)
- Advantages - Lower interest rates, less total interest paid, and you build equity faster (than a 30-year term)
- Disadvantages - Locked into higher monthly payment for 15 years
Biweekly Mortgage
A good choice if you are willing to make more frequent payments is a Biweekly MortgageBiweekly Mortgage - A mortgage on which the borrower pays half the monthly payment every 2 weeks. This results in 26 payments per year (rather than 24, as in bimonthly), and the loan is paid off before term.. You pay off your loan sooner, just by paying on a more frequent schedule. For example, a biweekly mortgage payment can pay off a $200,000, 30-year fixed loan at 7% in approximately 24 years (75 months sooner than a standard payment plan), with a total of $68,925 in interest savings.
- Best When - You can afford to make two payments per month
- Advantages - A small change in frequency provides huge savings long-term
- Disadvantages - Less flexibility in payment timing
LOAN STRUCTURE
Balloon Mortgage
A Balloon MortgageBalloon Mortgage - A mortgage which is payable in full after a period of time that is shorter than the term, usually 5, 7, or 10 years. After that time period elapses, the balance is due or is refinanced by the borrower. is a good choice if you know you won't be keeping the home long-term. Payments are relatively low, and if the correct term is chosen, the balloonBalloon - The loan balance remaining at the time the loan contract calls for a full repayment. will never come due while you own the home. On a 7-year balloon for example, the payment is relatively low because it's amortized over a 30-year period. But after 7 years, the balance becomes due, so the loan must either be paid off or refinanced. You do, however, run the risk of higher interest rates at the end of the balloon period.
- Best When - You plan to move before the balloon payment comes due
- Advantages - Regular monthly payments that are relatively low
- Disadvantages - If you decide to keep the home, you must pay off the loan or refinance at end of term, when rates may be higher
Interest-Only Mortgage
If you need the lowest possible payment, you can opt for an Interest-Only MortgageInterest-Only Mortgage - A mortgage where the monthly mortgage payment consists of interest only and during the interest-only payment period, the loan balance remains unchanged.. No part of the payment goes toward principal, so the loan balance remains unchanged over time. The term of the loan is usually short (up to 10 years). You have the flexibility to make payments toward the principal, if you wish.
- Best When - You want a low monthly payment
- Advantages - With the money you save, you can invest in something else instead
- Disadvantages - You aren't paying down the principle (that's optional)
CASHING EQUITY OUT OF YOUR HOME
Home Equity Loan
Home Equity LoansHome Equity Loan - Also called a "second mortgage," this is a loan that uses the equity in a home as collateral. It is often used as a way of consolidating other debt. Interest on a home equity loan is deductible. are usually made for the purpose of making home improvements or debt consolidation, but the money can be used for anything. A home equity loan is another mortgage in addition to any existing mortgage. Interest paid on a home equity loan is tax deductible.
- Best When - You have home equity, but are paying a high interest rate on other debt
- Advantages - You can consolidate debt at a lower interest rate, and the interest is tax-deductible
- Disadvantages - If you default on the loan, your property can be foreclosed on
Home Equity Line of Credit
A Home Equity Line of Credit doesn't provide funds in a lump sum. Instead, it's a mortgage set up as a line of credit, from which a borrower can draw, up to a maximum amount. Money can be drawn by writing a check or using a credit card.
- Best When - You have equity and will need cash in increments, as when remodeling
- Advantages - You only pay interest on what you've borrowed (not on a large lump sum)
- Disadvantages - If not careful, you may run up large debt more quickly than anticipated
If you want to learn more about loan types and terminology, please browse through our Glossary.
