Frequently Asked Questions
What is a Mortgage?
A Mortgage, or home loan, is a legal contract made between a lender and a borrower that uses the transfer of an interest in property to the lender as a security for a debt. While a mortgage in itself is not a debt, it is the lender’s security for a debt. The lender can take possession of the property if the borrower fails to pay the prearranged home loan payments.
What is a Mortgage Refinance and why should I refinance?
A refinance is when the borrower uses the money from a loan to pay off an existing home loan. There are numerous reasons customers refinance the loans they already have, including; to lower the monthly payment or interest rate, to switch from an adjustable rate to a fixed rate, or vice-versa, to refinance for a higher amount in order to pay off other debts or get cash, to use some money out of their equity, or most commonly to improve overall cash flow.
How is my loan application information used to come up with loan options and interest rates?
When putting together potential loan options for you, we provide potential loan solutions to fit your specific, unique needs. There are several aspects taken into account when determining potential loan options and interest rates including the property price, down payment potential, the intended years of residence in the home, use of home (rental or owner-occupied), income, debt, credit score, the property’s appraised value, and many other factors. Because there are several factors it’s always best to speak with Jeff Laeng directly about your particular situation to make sure you qualify, and that we can find a program that suits your specific goals.
What’s the difference between a Fixed and Adjustable Rate Mortgage?
With a fixed-rate mortgage, the interest rate and the amount you pay each month remain the same over the life of the loan, traditionally 15 or 30 years. With an adjustable-rate mortgage (ARM), the rate fluctuates according to the interest rates in the economy. Initial rates are typically offered at a discounted rate, lower than the rate for fixed mortgages, but will change over time. The ARM rate is capped on how much and how often the rate and/or payments can change in a year and over the life of the loan. When choosing which mortgage is right for you, consider factors that could affect your decision, such as how a higher monthly payment might impact your budget if the rate were to increase and the length of time you plan to stay in your home.
How much do I need for a Down Payment?
One of the biggest misconceptions in the mortgage industry! People in varying areas of the West were asked how much they thought was needed to buy a new home, and surprisingly 80% of those asked thought that 20% was the minimum. The truth is you can purchase a new home with as little as 3% down and in some cases 0% down depending on certain loan programs. In addition, the down payment can be partially or fully gifted from family members.
What is LTV?
LTV stands for loan-to-value. It is the total amount of your loan on the property divided by its fair market value. The LTV is calculated by the lender to see which type of loan you can qualify for as well as to examine the risk of the loan. Higher LTV ratios are generally seen as higher risk and will generally cost the borrower more or will require the borrower to purchase mortgage insurance. Formula: Loan to Value Rate = Mortgage Amount divided by Appraised Value of the Property.
Do I have to have Perfect Credit?
While it is true that if your credit score is high you may receive better rates and have more options available to you, this doesn’t mean you can’t obtain a mortgage if you’ve had some slips in the past. Credit is only one factor in the underwriting process, so don’t think that this alone will stop you from getting a loan; however, your credit history needs to demonstrate both willingness and ability to repay on time. Even if you’re sure you have excellent credit, it’s wise to double-check. Straightening out any errors or disputed items now will avoid troublesome holdups down the road when you’re waiting for mortgage approval.
What does DTI mean?
Your DTI helps determine how much house you can afford. When looking at a mortgage there is the front-end ratio and the back-end ratio that make this determination. The Front End Ratio is determined by adding together your proposed monthly mortgage payments, including principal and interest, taxes, insurance, and any homeowners association or condominium complex dues. This total is then divided by your total gross income. The Back End Ratio – your DTI (Debt to Income) – is determined by adding together the total mortgage payment as above, plus any other monthly financial obligation including credit card payments, auto loans, or lines of credit, etc. This total is then divided by your gross monthly income. If you have no monthly payments besides your mortgage, your front, and back-end ratios will be the same.
Can I get Pre-Approval?
Yes, you can. Your information is reviewed, including your income, assets, credit, and present debt, and a decision is made as to what you qualify for. Once pre-approved, you can look for a new home with the confidence of being a strong buyer, and sellers will feel more comfortable dealing with you.
What are Points?
Points are a one-time fee that a borrower pays to lower the interest rate. A point is a unit of measure that means 1% of the loan payment. So, if you take out a $200,000 loan, one point equals $2,000. Points can be charged as origination fees by the lender, but they can also be charged in order to lower your interest rate, which would lower your monthly payment. Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points.
What are Closing Costs?
Closing costs include items like appraisal fees, title insurance fees, attorney fees, pre-paid interest, and documentation fees – to name a few. These items are paid by both buyers and sellers and are usually different for each customer due to differences in the type of mortgage, the property location, and other factors. You will receive a Loan Estimate of your closing costs in advance of your closing date for your review.
What is a Home Appraisal?
A home appraisal is a survey of a home by a professional appraiser to generate an estimate of the property's market value. The appraisal is a detailed report that looks at various factors regarding the home including the condition of the home, the neighborhood, what comparable homes are selling for, and how quickly they are selling. The home appraisal is not the same as a home inspection, which should also be completed when buying a new home.
Do I need an Appraisal?
Sometimes an appraisal is not needed; other times a full appraisal must be completed. Only after reviewing your application and collateral information is it determined whether one is needed for your situation.
What are property taxes and Impound accounts?
Property taxes are the taxes that are collected based on the assessed value of the real property and are to be paid by the property owner. An impound account is an account set up by the lender for payment of property taxes, hazard insurance, and any other recurring expenses such as mortgage insurance and flood insurance. Typically an impound account holds prepaid recurring costs for 2-6 months. Usually, loans with a low loan-to-value ratio (higher down payment) do not have an impound account requirement.
How does Hazard Insurance Work?
Hazard insurance is a type of property insurance purchased by homeowners to protect against fire, flood, wind, earthquakes, or other disasters. Comprehensive homeowner’s insurance usually covers damage to property, as well as liability for injuries on the property or damage caused to other property. Hazard insurance tends to focus specifically on property damage caused by unique sources. The homeowner is responsible to pay this insurance policy to protect the investment of the lender, which is why it is usually a requirement at closing. If the home is destroyed or damaged beyond practical repair, the ability of the homeowner to continue paying the mortgage will likely be significantly impaired at the same time the collateral securing the loan would be seriously devalued. Hazard insurance helps guarantee that at least the mortgage will be paid down.
What is Title Insurance?
Title insurance is protection against loss arising from problems connected to the title to your property. A home may have gone through several ownership changes before you purchased it, and the land on which it stands went through many more. There may be a weak link at any point in that chain of ownership that could emerge to cause trouble. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.
What is the role of the Escrow Company?
The Escrow Company is a disinterested third party that does not represent anyone in the transaction but serves an integral role in the closing process. This role begins when an executed contract is delivered to the escrow company, which then begins a Title Search. Once the title to the property is deemed “clear”, the Title Insurance Policy is prepared. Additionally, the escrow company assigns an escrow officer to manage and facilitate the closing by being in contact with all parties involved in the transaction and making sure that all documents are properly gone over and signed. Finally, it is the escrow officer who distributes all signed and executed documents to the appropriate parties to ensure the successful transfer of title from one party to the other.
Why is my mortgage a matter of public record?
A home loan is an amount of money borrowed to finance the purchase of a property. A mortgage is a legal document that creates a lien on a property, to secure the lender’s interest on the home loan being issued. At escrow, your lien (or Deed of Trust, in some states) for your mortgage is filed with the County, at which point it becomes public record.
How does my credit score affect my interest rate or pre-approval?
A borrower’s credit score is very important to the pre-approval process and will have an effect on the interest rate a borrower is able to get a loan at. It is important to clear up major credit issues before beginning the pre-approval process, which is why it is important to speak with your Loan Officer early in the process and before you begin. There are several small, easy things you can do to bump up your credit score, but nothing is more important than making timely payments on outstanding debts, such as credit cards and auto loans. Also, make an effort to keep the outstanding balances at or below 30% of the credit limit available. Speak with your Loan Officer to learn more.
What are the current rates, and when should I lock in my loan?
When it comes to locking loans, the market trends and current rates are important. What’s more important in the home loan process is finding a mortgage professional that you can trust. It is valuable insight to meet with professionals that understand the business and the markets. Having Jeff Laeng, CMPS® as your dedicated Mortgage Loan Specialist that you trust and have on your side early, is invaluable to you as a consumer because he will keep you informed all throughout the process and make the best rate lock on your behalf.
What is the difference between interest rate and APR?
The interest rate is the annual rate that is charged for borrowing money. An Annual Percentage Rate (APR) is a calculated rate that includes the interest rate and any additional cost or prepaid finance charges. The APR is a percentage that may assist you in comparing the overall cost of lending options that takes into account additional items such as points, and fees at closing, not just the interest rate.
Why are your rates different than those I have seen advertised?
When comparing loan rates to those in newspapers or other mediums, keep in mind the rates in those publications may have been reported one or more days ago. These rates may be different because rates can change multiple times in a single day. The best way to find out about the current market trends and rates is to call Jeff Laeng directly and get up-dated daily rate information.
What is a short sale?
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens' full amounts, and whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans unless specifically agreed to between the parties. However, in California, legislation was passed to preclude deficiencies after a short sale is approved. The same is true of lenders on first loans and lenders on second loans — once the short sale is approved no deficiencies are permitted after the short sale. A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower. Both often result in a negative credit report against the property owner.