| 1. |
What can I afford? Answer |
| 2. |
What are closing costs? Answer |
| 3. |
What are prepaids and escrows? Answer |
| 4. |
What are discount points? Answer |
| 5. |
How much of a down payment do I need? Answer |
| 6. |
What is Private Mortgage Insurance? Answer |
| 7. |
What is the debt to income ratio? Answer |
| 8. |
What are cash reserves? Answer |
| 9. |
What does 'loan to value' mean? Answer |
| 10. |
How do I 'lock in' an interest rate? Answer |
| 11. |
What if I don't have any established credit? Answer |
| 12. |
What if I have 'less than perfect' credit? Answer |
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Q
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What can I afford? |
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A
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Knowing what you can afford is the first rule of homebuying, and that depends on how much income and debt you have. It pays to get pre-approved before you start searching for a home. The price you can afford to pay for a home will depend on these factors:
Your gross monthly income
The amount of cash you have available for the down payment
The type of mortgage you select
The amount of taxes and insurance on the home you select |
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Q
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What are closing costs? |
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A
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Closing costs are paid by the borrower at or prior to closing charged by the lender and other parties to make the loan. These costs can include origination fees, discount points, title and abstracting charges, recording fees, processing and underwriting fees, credit bureau fees, flood certification fees, and closing attorney fees. In addition, there will be prepaids and escrows that will need to be paid at closing. Generally, borrowers should estimate that their closing costs could run between 4-6% of the loan amount. |
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Q
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What are prepaids and escrows? |
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Prepaids and escrows are not costs - they are cash requirements that the borrower pays at closing. Prepaids and escrows include interest through the end of the month of closing, the first year homeowners insurance premium, and the funds required to set up the escrow account for the payment by the lender of future homeowners insurance and property taxes as they become due. |
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Q
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What are discount points? |
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A
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Discount points are paid at closing and are typically used to 'buy down' the interest rate. A point is 1% of the loan amount. |
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Q
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How much of a down payment do I need? |
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A
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Historically, lenders required a 20% downpayment for conventional financing. However, several programs are available today that enable the borrower to provide as little as 3% down or even no down payment under certain strict guidelines. In some cases you may be able to receive a gift for the down payment from a family member or borrow the down payment from your 401(k) account. |
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What is Private Mortgage Insurance? |
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Private Mortgage Insurance (PMI) is insurance for the lender in case the borrower defaults on the mortgage and the property goes in to foreclosure. PMI is placed on any conventional loan where the loan amount is greater than 80% of the sales price (or the down payment is less than 20%). PMI is included in your monthly payment and the amount varies depending on the down payment amount (ie. you will generally pay less PMI with a 15% down payment than a 5% down). |
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Q
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What is the debt to income ratio? |
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The debt to income ratio is your total monthly housing expense plus any recurring debts (i.e. monthly minimum credit card payments, car payments, student loan payments, etc.) divided by your monthly gross income. |
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Q
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What are cash reserves? |
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Cash reserves are the funds a borrower has remaining after their loan closes. The normal requirement is 2 months of the monthly mortgage payment but the amount varies by loan program. |
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Q
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What does 'loan to value' mean? |
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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 a 5% down payment, you would be borrowing 95% of the total sales price from the lender. Therefore, your LTV would be 95%. |
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Q
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How do I 'lock in' an interest rate? |
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A
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Once you have a signed purchase agreement, you can lock in your interest rate with your loan officer. The time period your rate is locked can vary between 15 and 60 days depending on your projected closing date. Once you have locked your rate, you are protected in case the interest rate goes up before your closing date. Locking an interest rate requires careful consideration as you can not 're-lock' if the interest rate goes down before your closing date. |
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Q
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What if I don't have any established credit? |
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A
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If you do not have enough established credit, your loan officer can work with you to document an alternative credit history. An alternative credit history can consist of verificatiion of payments to a landlord, utility company, phone service, cable company or car insurance company. Not all loan programs will accept an alternative credit history but your loan officer can advise you of the programs that will allow this type of documentation. |
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What if I have 'less than perfect' credit? |
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A good credit history is important, but a perfect credit history is not. Your loan officer can advise you of the programs available to you based on your credit history, debt to income ratios, and the amount of money available for down payment. |
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