We understand that the purchase of your new home is one of the biggest decisions you will ever make! Below is a list of the most Frequently Asked Questions we have encountered that can help put your mind at ease during this process. If you have a specific question that isn’t answered below, feel free to contact one of our AHF mortgage professionals.
How much you will pay each month will depend a lot on the term of your loan. That is, how long do you plan on paying the loan back. Most mortgages are either 30-year or 15-year terms. Longer term loans require less to be paid back each month; whereas shorter terms require larger monthly payments, but pay off the debt more quickly.Most monthly payments are based on four factors: Principal, Interest, Taxes and Insurance, commonly referred to as PITI.
This is the amount originally borrowed to buy a home. A portion of each monthly payment goes to paying this amount back. In the beginning, only a small fraction of the monthly payment will be applied to the principal balance. The amount applied to principal will then increase until the final years, when most of the payment is applied toward repaying the principal.
To take on the risk of lending money, a lender will charge interest. This is known as the interest rate, and it has a very direct impact on monthly payments. The higher the interest rate is, the higher the monthly payment.
While real estate taxes are due once a year, many mortgage payments include 1/12th of the expected tax bill and collect that amount along with the principal and interest payment. This amount is placed in escrow until the time the tax bill is due. Borrowers may be able to opt out of escrowing this amount, which would reduce the monthly payment, but also leave them responsible for paying taxes on their own.
Insurance refers to property insurance, which covers damage to the home or property, and, if applicable, mortgage insurance. Mortgage insurance protects the lender in the event of default and is often required in cases where borrowers have less than 20% equity in the home. Like real estate taxes, insurance payments are often collected with each mortgage payment and placed in escrow until the time the premium is due. Again, borrowers may be able to opt not to escrow the insurance amount, instead paying the total amount due in one lump sum on their own.
While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time: Pay your bills on time. Late payments and collections can have a serious impact on your score. Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score. Reduce your credit-card balances. If you are “maxed” out on your credit cards, this will affect your credit score negatively. If you have limited credit, obtain additional credit. Not having sufficient credit can negatively affect your score.
Loans where the borrowers’ down payment is less than 20% often require mortgage insurance, which can be provided privately or publicly. Conventional loans requiring MI are insured by private mortgage insurance. FHA loans are those whose MI is provided by the Federal Housing Administration, a public, government program backed by taxpayers. Both mortgage insurance options have premiums, often paid by the borrower. Each program has advantages and disadvantages depending on your unique situation.
A rate lock is a lender’s promise to “lock” a specified interest rate and a specified number of points for you for a specified period of time while your loan application is processed. During that time, interest rates may change. But if your interest rate and points are locked in, you should be protected against increases. Conversely, a locked-in rate could also keep you from taking advantage of price decreases.
There are four components to a rate lock:
1- Loan program
2- Interest rate
4- Length of the lock period
The longer the length of the lock period, the higher the points or the interest rate will be. This is because the longer the lock, the greater the risk for the lender offering that lock.
Interest rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher; whereas when the economy is slowing, the demand for credit decreases and so do interest rates. Inflation drives interest rates. Higher inflation is associated with a growing economy. When the economy grows too quickly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing.
When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.
A home is an investment. When you rent, you write your monthly check and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes. This will save you a lot each year, because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner. In addition, the value of your home may go up over the years. Finally, you’ll enjoy having something that’s all yours – a home where your own personal style will tell the world who you are.
You may be a good candidate for one of the federal mortgage programs. Start by contacting one of the HUD-funded housing counseling agencies that can help you sort through your options. Also, contact your local government to see if there are any local homebuying programs that might work for you. Look in the blue pages of your phone directory for your local office of housing and community development or, if you can’t find it, contact your mayor’s office or your county executive’s office.
A Loan Officer can work with you to get you pre-approved BEFORE you look for a home. Based upon information you present to the Loan Officer at the loan application, they will determine the approximate amount of money that you will be allowed to borrow. You will be “pre-approved” for that loan amount. By allowing your Loan Officer to run your credit report and verify your assets and income, your loan application can be submitted to the underwriter for a full credit approval. We can help you obtain a complete written credit approval (subject to an appraisal) before you make an offer on a home, if you desire.
Good question! If you have everything with you when you visit your lender, you’ll save a good deal of time. You should have:
1) social security numbers for both your and your spouse, if both of you are applying for the loan;
2) copies of your checking and savings account statements for the past 6 months;
3) evidence of any other assets like bonds or stocks;
4) a recent paycheck stub detailing your earnings;
5) a list of all credit card accounts and the approximate monthly amounts owed on each;
6) a list of account numbers and balances due on outstanding loans, such as car loans;
7) copies of your last 2 years’ income tax statements; and
8) the name and address of someone who can verify your employment.
Depending on your lender, you may be asked for other information.
There are many types of mortgages, and the more you know about them before you start, the better. Most people use a fixed-rate mortgage. In a fixed rate mortgage, your interest rate stays the same for the term of the mortgage, which normally is 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your mortgage payment will be, and you can plan for it. Another kind of mortgage is an Adjustable Rate Mortgage (ARM). With this kind of mortgage, your interest rate and monthly payments usually start lower than a fixed rate mortgage. But your rate and payment can change either up or down, as often as once or twice a year. The adjustment is tied to a financial index, such as the U.S. Treasury Securities index. The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate will be lower.
Loan to value (LTV) is the loan amount divided by the lesser of the sales price or appraised value. For example, if you are paying 15% of the total cost of the home as a down payment, you would only be borrowing 85% of the total sales price from the lender. Therefore your LTV would be 85%.
A Loan Officer can “lock-in” the interest rate quoted, over the telephone during their pre-qualification interview with you. We will provide you a written Interest Rate and Price Determination Agreement which details the interest rate and terms of the loan you have requested, as well as the period of time the rate is locked. This may vary between 10 days and 60 days depending upon your projected closing date.
A mortgage payment is typically made up of four components: principal, interest, taxes and insurance. The Principal portion is the amount that pays down your outstanding loan amount. Interest is the cost of borrowing money. The amount of interest you pay is determined by your interest rate and your loan balance.
Well, of course you’ll have your monthly utilities. If your utilities have been covered in your rent, this may be new for you. Your real estate broker will be able to help you get information from the seller on how much utilities normally cost. In addition, you might have homeowner association or condo association dues. You’ll definitely have property taxes, and you also may have city or county taxes. Taxes normally are rolled into your mortgage payment. Again, your broker will be able to help you anticipate these costs.
Use our simple mortgage calculators to see how much mortgage you could pay – that’s a good start. If the amount you can afford is significantly less than the cost of homes that interest you, then you might want to wait awhile longer. What are “Cash Reserves”? Cash Reserves are the funds a borrower has remaining after their loan funds. The normal requirement could be monies equal to 2 months of the mortgage payment. The amount of Cash Reserves varies by loan program, but larger reserves are a strong compensating factor.
There is help available. Start by becoming familiar with the homebuying process and pick a good real estate broker. Although as a single parent, you won’t have the benefit of two incomes on which to qualify for a loan, consider getting pre-qualified, so that when you find a house you like in your price range you won’t have the delay of trying to get qualified. Contact one of the HUD-funded housing counseling agencies in your area to talk through other options for help that might be available to you. Research buying a HUD home, as they can be very good deals. Also, contact your local government to see if there are any local homebuying programs that could help you. Look in the blue pages of your phone directory for your local office of housing and community development or, if you can’t find it, contact your mayor’s office or your county executive’s office.
The amount charged for services performed by the company and/or mortgage company handling the initial application and processing of the loan.
Lenders fees are fees that offset the cost of producing the loan. Different companies may refer to them by different names, such as processing fees or underwriting fees.
No. A homeowner’s inspection is generally requested by the buyer as a condition to the purchase of the home. Many home buyers, however, will make the purchase of their home contingent upon a homeowner’s inspection. A homeowner’s inspection should not be confused with an appraisal, which is required by most lenders in order to support the valuation of the mortgage security.
Your credit payment history lets the Lender know your intentions to repay the loan. Therefore a good credit history is important, but a perfect credit history is not. Credit counseling agencies specialize in meeting with clients and reviewing your credit history. If you have any outstanding credit obligations that need to be dealt with, the credit agency can work with you and help you make arrangements to pay any outstanding debts that you may have. First time home buyers can also attend seminars that will go through the home purchasing process and requirements with you.
If you do not have enough established credit, your Loan Officer can work with you to document alternate credit information. If you have been renting, we can obtain a rental rating from your landlord as a way of verifying your payment history. Or, we can contact your utility companies, phone service, cable companies or car insurance carrier to obtain a rating on your payment history. Not all loan programs will accept alternative documentation on your credit. There are both government and conventional programs that will accept this type of payment history to establish credit qualifications.
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