Q: What is APR (Annual Percentage Rate)?
A: APR is an annual percentage rate that represents the complete annual cost of your mortgage loan. This means that, in addition to the interest charged on the loan, all other costs such as, discount points, appraisal and credit report fees, processing and document fees, are calculated into your APR or Annual Percentage Rate.
Q: What are Closing Costs?
A: Closing costs are all fees over and above your loan amount and down payment that are associated with processing your loan. These fees are due at the time the property transfers from the seller to the buyer, or at the Closing. Closing costs may include, but are not limited to, title search fee, title insurance premiums, appraisal fee, recording fees, credit report charges, attorney fees or escrow fees, and discount points. You should receive an estimate of your closing costs in what is called a Good Faith Estimate within 3 days of completing your loan application.
Q: What is the difference between a conforming and nonconforming loan?
A: A conforming loan abides by the guidelines of the federal government. A nonconforming loan has no set guidelines. A conforming loan is a loan which follows all the guidelines and mortgage limits used by Fannie Mae (Federal National Mortgage Association) or Freddie Mac (The Federal Home Loan Mortgage Corporation). These guidelines cover areas such as maximum loan amount, down payment, borrower credit, and borrower’s income. Most of the loans in the U.S. are conforming loans. A nonconforming loan is one that does not follow the guidelines used by Fannie Mae or Freddie Mac.
Q: What are discount points and should I pay them?
A: Discount points are fees that lenders can charge to allow you to receive a lower interest rate. One point equals 1% of your loan amount. For example, on a $100,000 loan, one point would equal $1,000. The more points you pay, the greater the discount in your interest rate. Points are not required, but generally, if you plan to stay in your home longer than 5 years it’s advantageous to pay 1 to 2 points. If you know you are staying in your home less than 5 years, you may want to choose not to pay points.
Q: What is a FHA loan?
A: A FHA loan is insured by the Federal Housing Administration, a federal agency within the U.S. Department of Housing and Urban Development (HUD). Available to consumers who what to refinance or purchase a new home, it's the ideal loan program if you have a lower credit score, lower income or less cash available for down payment on your new home. Through the FHA loan program, you still have the option of getting a Fixed Rate or Adjustable Rate Mortgage at terms that meet your goals.
Q: What is a FICO score and how important is it?
A: A FICO score is a credit score which predicts the probability that borrowers will pay their bills. A higher FICO score enables you to obtain a loan with good terms, lower interest and a lower monthly payment. This score is widely used by lenders and is therefore an important part of the loan qualification process. It is recommended that you check your credit rating and FICO score prior to obtaining a mortgage loan so that any disputed items, errors, etc., that you may encounter can be cleared up before the loan process begins.
Q: What is the different between a Fixed-Rate or an Adjustable-Rate Mortgage Loan?
A: A fixed-rate loan keeps the same interest rate the entire term of your loan. A fixed-rate loan provides the security of knowing your loan payment will not change regardless of interest fluctuations during the term of your loan. An adjustable-rate mortgage (ARM) has an interest rate that can change during the term of your loan. It may have an initial interest rate that is lower than a fixed-rate loan but it can change after a designated period of time and then adjusts to the current market interest rate.
Q: How much do I need for a down payment?
A: This depends on the loan program you choose and your credit history. There are programs that allow a very low down payment or even no down payment at all. As a rule, a down payment will be between 3% and 20% of the home’s value. Keep in mind, the size of your down payment greatly affects your monthly payment and the terms of your loan.
Q: What is LTV or Loan to Value?
A: The LTV or Loan to Value ratio is the amount of your loan compared to the appraised value of your property. This ratio directly affects the loan programs and rates you will be eligible for. Lenders will offer better loan programs and rates to borrowers with lower LTV ratios.
Q: What is PITI?
A: PITI stands for Principal, Interest, Taxes and Insurance. Your monthly payment is principal and interest and often also taxes and insurance depending on whether or not the lender requires them to be paid with your loan payment.
Q: What is Private Mortgage Insurance (PMI) and Upfront Mortgage Insurance Premium (UPMIP)?
A: This is insurance that protects the lender in case the borrower defaults on the loan. Private Mortgage Insurance (PMI) is generally required by a lender if the down payment is under 20% of the loan or the LTV is 80% or more.
FHA requires mortgage insurance to be paid in two ways. First, there is a 1.5% Upfront Mortgage Insurance Premium (UPMIP) that is required on all FHA loans. Generally, this is financed as part of the transaction. In addition to the upfront premium, there are monthly premium requirements for most loans depending on the Loan-to-Value and term of the loan.
In most cases, the insurance is no longer required after five years or if the loan balance is less than 78% of the value of the property - whichever is longer.
