Q: How can I compare the rates quoted by different lenders?

A: There are three considerations in determining the price of a loan. These considerations are the contract rate quoted, the amount of points and/or origination fees associated with that rate, and the length of time the lender will promise to deliver that price to you. For example, two lenders could quote to you a 30-year fixed rate at 8%. However, one lender will quote 1.5 points and guarantee that day’s rate for 30 days. The other lender will quote only 1 point but will not guarantee the rate at all. The rate could easily change before you have a chance to close the transaction. So which is the better price? Also see the discussion of APR.

Q.  What are points?

A: A point is 1 percent of the loan amount. "Discount points" generally vary inversely with the rate quoted -- that is, the lower the rate quoted, the higher the amount of points charged. Discount points are used to adjust the yield on the loan to the institution providing the money. Origination points, such as is common for FHA and VA loans, are generally charged by the lender to offset the lender costs of administering the transaction.

Q:  Is a "no-cost loan" really no cost??

A:  There is no free lunch, even in mortgages. Every real estate financing transaction has costs for processing the application, appraising the subject property, administering the transaction escrow, securing title insurance, etc. In a typical "no-cost loan" the lender agrees to pay all of the costs of the transaction for the borrower in exchange for the borrower paying a higher price for the loan. Depending on the individual borrower's circumstance, this may or may not be a "good deal."

Q:  What does a "rate lock" mean?

A: Many borrowers do not want to be surprised at the close of the transaction with a rate which is higher than what was quoted at the beginning of the process. Hence, many borrowers ask that the lender commit or "lock" the initial rate quoted for a period of time sufficient to close the transaction.
When a rate is "locked" the lender is being asked to guarantee the price of a commodity, the price of which changes daily. (Check out the daily changes in the bond market, which is a measure of the price of money on a daily basis.) The longer the lock period, the riskier the position of the lender, hence the higher the loan price (points) charged the borrower.

Q:  What does it mean to "qualify" for a loan?

A: All lenders have certain rules by which they determine whether a prospective borrower will be able to repay the loan. These rules are based on the repayment histories of millions of borrowers and the characteristics of those borrowers who defaulted on their loan payments. For example, statistics show that the lower the down payment, the more likely the borrower is to default on payment.

Q:  What is the difference between pre-qualification and pre-approval?

A:  It just makes sense for the borrower to determine what house price they can afford before spending time looking for a new home. Loan officers help borrowers discover what is an affordable home price by asking the borrower a series of questions. These questions include the amount and source of the borrower’s income, the amount of other debt obligations, and the borrower’s history of paying those debts. Based on the borrower’s answers, the loan officer can offer an opinion as to whether the borrower would qualify for a given loan.
Pre-approval generally means that documentation of the borrower’s income, assets, and credit history has been secured and submitted to the lender’s underwriter. The underwriter is the individual responsible for making the lending decision on the loan. Pre-approval is considered a stronger indication of the borrower's ability to qualify and receive financing

Q:  What is a FICO score?

A: In order to streamline the decision making process, the lending industry has developed a system which scores the borrower's credit history. The score is seen as predictive of the borrower’s ability and willingness to repay the loan. Such scoring gives the lender the ability to give the borrower a rapid credit decision by using automated underwriting software currently available. Few lenders base their entire credit decision on the score, however. Lower FICO scores usually trigger a real live underwriter review of the loan application and credit report before a final decision is made.

Q:  If I have had some credit problems in the past, can I still get a home loan?

A:  Yes, many lenders specialize in financing for people who have had credit difficulty.  Get a copy of your credit report and get negative entries removed by writing to the credit agency.  They have 30 days to verify the information or remove it.

Q:  What does ‘cash to close’ mean?

A:  Cash to close means the total amount of cash needed to complete a purchase transaction. This cash includes the down payment on the purchase price of the home, an amount of money sufficient to pay all of the transaction costs due from the borrower, and enough cash "left over" to make at least two or three month’s payments.

Q:  What is mortgage insurance? How is it different from
      homeowner’s insurance?

A: Mortgage insurance, often called "private mortgage insurance" or PMI for short, insures the lender against losses which could be incurred should the borrower not make payments and the loan go into default. It is this kind of insurance which allows lenders to make loans where the borrower's down payment is less than 20%. Conceptually, it is patterned after the federal government’s FHA home loan programs in which the federal government guarantees lenders against the loss of default for loans on properties on which the borrower puts down as little as 3% of the purchase price.
The term "mortgage insurance" is also used for those types of life insurance policies which are used to pay off the balance of the mortgage in the event of the borrower’s death. Yes, it is confusing.
Homeowner’s insurance, also referred to as hazard insurance, is your traditional insurance used to protect the borrower/homeowner against property loss from fire, weather, etc.

Q:  How do I know whether I need flood insurance?

A: The Federal Emergency Management Agency, or FEMA, has divided most of the United States into varying flood zones according to the area’s likelihood of being flooded. If the property is in a designated flood zone, and the proposed loan against that property is in any way connected to the government, then flood insurance is required. Period. A call to your municipal planning authority is probably the easiest way to determine whether your home is in a flood zone.

Q: What is included in my monthly payment?

A: The monthly payment is mostly interest due on the loan and a small repayment of the principal. Many borrowers also pay a monthly amount for property taxes, hazard insurance, and private mortgage insurance if required. The lender holds these payments in an "escrow" or "impound" account until it is time to pay the borrower’s property taxes or insurance premiums.

Q: What is an escrow account?

A: The escrow account in a mortgage payment context is a special account that the lender holds on the behalf of the borrower in which is deposited monthly installments for property taxes, hazard insurance, and private mortgage insurance if required. The lender then pays these obligations on behalf of the borrower when they are due.

Q.  What happens when my loan is "sold"?

A: Often, the actual ownership of the loan remains the same, but the responsibility for the servicing or the bookkeeping on the loan changes hands. For example, Fannie Mae may be the institution which furnished the funds for the loan and continues to "own" it, but it may contract with different servicers over the life of the loan to collect the payments. Most home loans made today are subject to having different servicers over the life of the loan. 

Q. What is a pre-payment penalty and how do I know I have one on my loan?

A:  IA prepayment penalty is an interest charge due from the borrower when the loan is paid off prior to the expiration of a time period defined in the loan contract or note. Pre-payment penalties are becoming more common as lenders offer discounted interest rates to borrowers in exchange for a more certain yield on the loan over the specified time period.

Q.  If I pay extra each month, how much quicker can I pay off my loan?

A: As long as you do not run afoul of any pre-payment penalties which may be in your loan, paying extra each month can reduce the term of the loan. For example, making the equivalent of one extra payment each year can take eight years off a 30 year term.

Q: What is the benefit of a "bi-weekly" mortgage?

A: There is really no secret to the widely touted "bi-weekly mortgage." As the name implies, the borrower pays half the monthly mortgage payment every two weeks (bi-weekly). At the end of the year, the borrower has made 26 half payments, or 13 full payments, or one more payment than required. One extra payment per year made in this manner can reduce a 30-year loan term by eight years.

Q: Do I have to have a property to apply for a loan?

A:  The most efficient way of shopping for a home is to know ahead of time the financing for which you qualify. One step better is to have the lender approve you for a specific loan amount so that you and the seller will know that you are able to complete the transaction.

Q: What paperwork does the lender need to process the application?

A:  Generally the lender will require proof of employment and income in the form of paystubs and/or tax returns and proof of assets in the form of bank or brokerage statements. Usually, this documentation and a credit report is sufficient for the lender to determine whether the borrower can afford the requested loan amount. If a property is identified, then an appraisal, property condition report, and preliminary title report will be required along with a complete copy of the purchase contract.

Q: How do I know when it is a good time to refinance?

A:  The old rule of thumb on refinancing held that the interest rate would need to decline by at least 2% for the refinancing to be worthwhile. A more accurate measurement would be to consider the savings in monthly payment, the costs of the loan transaction, and the term of the new loan compared to the old term. The key is to determine whether the benefits of payment savings and/or term reduction exceeds the costs of the transaction.

Q: What is a conventional loan?

A:  A conventional home loan is one which is not guaranteed by the Federal government. This is also true of FHA and VA loans.

Q: What is a conforming loan? What is a non-conforming loan? FHA and VA?

A:  A conforming loan conforms to the requirements of Fannie Mae and Freddie Mac. Usually, the specific reference is to loan amount. The maximum loan amount for 1997 as specified by Congress for single family loan purchased by either of these two agencies is $227,150. The term also refers to a loan which conforms to all of the other borrower and property requirements of these two agencies.
A non-conforming loan is generally meant to be those loan amounts above $227,150. The term can also refer to those loan programs which allow for different borrower and property characteristics than usually required by Fannie Mae and Freddie Mac..

Q: What is a B/C loan?

A:  Similar to the bond market, those loans which most closely conform to "vanilla" credit and property standards are referred to as "A" paper loans and loans which do not have these characteristics are described as "B" or "C" paper loans. Also, similar to the bond market, interest rates on B and C paper loans are somewhat higher than for A paper loans in order to compensate the lender for higher perceived risk.

Q: Who are Fannie Mae, Freddie Mac, and Ginnie Mae, and what do they have to do with home loans?

A:  Fannie Mae is the more personalized name for The Federal National Mortgage Association (FNMA), Freddie Mac is a similar name for The Federal National Mortgage Loan Corporation (FHLMC), and Ginnie Mae refers to the Government National Mortgage Association (GNMA). Fannie and Freddie are quasi-governmental agencies which serve as a conduit between the capital markets of Wall Street and home lending across the United States. Ginnie Mae performs a similar function for government FHA and VA home loans.