Do I need the services of a loan agent/officer when applying for a loan?
The answer depends upon the experience level of
a borrower as well as how complicated his or her mortgage transaction may be
(i.e. an applicant with blemished credit or one who cannot document their
income). An experienced borrower with solid credit who is looking to
probably able to fly solo whereas a first time buyer or someone who is looking
to close a transaction very quickly, may require the assistance and advice of
an active mortgage agent/officer.
How do I know if it makes sense for me to refinance?
First determine your financial mortgage related
goals: i.e. are you looking to improve your monthly cash flow, reduce your
mortgage term, do you need to take out cash utilizing the equity from your
home? Obtaining the right mortgage for your particular needs could make sense
even when rates are not at their lowest levels. First identify your goal and
contact a mortgage professional for suggestions on
programs that would best help you meet your objectives. Then shop for rates
after you have selected the appropriate mortgage program.
Effective February 13, 2008 and until December 31, 2008 the difference between a conforming and non-conforming (or jumbo) loan is now defined as follows: as part of the federal government's 2008 economic stimulus plan, the conforming loan limit which was previously capped at $417,000 for a single family home has now been temporarily increased to 125% of a metropolitan area or region's median home price as defined by HUD*. The maximum allowable loan limit is $729,750 for homes at the highest end of the median price spectrum and at the lowest end not less than $417,000. This temporary increase applies to both purchase and refinance loans. Therefore any loan amount which exceeds 125% of a region's median home price would be classified as a non-conforming (or jumbo) loan. Please refer to the Department of Housing and Urban Development* (HUD) website for more information on the median home price in your region or area: http://www.hud.gov/
What is the best way to shop
for a mortgage?
It is a good idea to contact at least three to
five lenders for input on mortgage programs and rates. You can do all of your
shopping on-line or by phone. If there are any usual twists to your mortgage
scenario, it is best to disclose as much information up front as possible to be
certain you are making an "apples to apples" mortgage comparison amongst
lenders. When making mortgage comparisons, you must be sure you are comparing
mortgages of similar terms, i.e. a 30 year vs. a
points vs. zero points, do the mortgages you are comparing have prepayment
penalties and do they have similar rate lock duration's?
What documentation will the
lender typically require to process my mortgage?
The answer depends upon the quality of your
credit and the amount of equity you have in your property. On a typical fully
documented mortgage application (where an applicant is seeking to qualify based
on an employee's salary), the lender will require: one month's current pay
stubs, W-2's for the prior two years and bank and investment account statements
for the prior 2-3 months. If an applicant is self-employed (has a 25% or
greater ownership in a business) then additional documentation could be
required (i.e. 1040's, 1165's, 1120's, P & L statement).
Are there limited
documentation (a.k.a. EZ doc, no income qualifier) mortgages available?
Yes there are many. They come in a variety of programs; some
have self-employment, credit, equity or asset requirements so it may be
advisable to have a mortgage consultant direct you to the appropriate product
for your needs. There are also mortgages available to individuals who cannot
verify either their income or assets (referred to as NINA mortgages). Keep in
mind that these products can carry higher interest rates than that of a
mortgage that is fully documented. A good rule to remember, the more
documentation a borrower can provide for a lender, the lower the rate they will
How can I avoid having to get
mortgage insurance on my mortgage? Many borrowers who have less than 20% equity in their homes,
choose a combination first and second mortgage (referred to as a piggyback
mortgage) to avoid mortgage insurance (MI). The most common method of financing
without MI is an 80-10-10 (an 80% 1st mortgage, 10% 2nd mortgage with 10%
equity). Also available is an 80-15-5 (requiring an 80% 1st mortgage, 15% 2nd
mortgage with 5% equity).
How much Homeowner's
insurance coverage will I need to close the new mortgage?
A safe bet is to buy a
guaranteed-replacement-cost policy that will generally pay out 20-50% more than
the face value of the policy to rebuild your home (this is also the preferred
policy of lenders). A replacement-cost policy typically adjusts the amount of
insurance each year to keep pace with rising construction costs in your area.
It is important to note that local building codes require structures to be
built to specific standards which could vary over time, if your home is
severely damaged, you may be required to rebuild it to current codes. Even
guaranteed-replacement-cost polices do not always cover this expense. However,
many insurers offer an endorsement that will pay for the upgrading cost, it is
a good idea to consider adding such an endorsement to your replacement-cost
Why do I need to pay for
another policy of title insurance when we already own the property and
purchased title insurance when we bought the house?
Before closing your new mortgage, your new
lender must be certain that the title to the property will be free and clear,
free of prior defects and indebtedness. A new policy is needed to protect the
new lender and subsequent investor of your new mortgage. Both a homeowner and
prospective lender need to be certain that what is available on the property is
what is referred to as a "marketable title". A title company researches the
legal history of the property that entails searching public records in the
offices of the county recorder. Problems with the title could threaten the
mortgage, limit ones use and enjoyment of the property and could result in
financial loss. A policy of title insurance protects a homeowner's title and
the insurer covers the cost of any legal challenges.
What is the best way to
shop for insurance?
A reliable method of shopping for both
homeowner's and earthquake insurance is to get estimates from at least three
high-rated companies. Be prepared to discuss the type of policy you want as
well as the coverage limits you require You may check insurance company ratings
at the following websites: www.ambest.com and
www.insure.com. If you find
you are in need of flood insurance, you may contact the National Flood
Insurance Program at (800) 638-6620 for a quote.
I am refinancing a condo (or
townhouse or PUD) and am aware that our HOA is currently in litigation with the
developer. Will I be able to refinance my mortgage?
A Homeowner's Association could leave itself
open for legal action if it doesn't act on legitimate building defects and
disclose these defects to all unit owners. However the fact that an association
is suing a developer can impact an owners ability to obtain financing. It is
vital to let your lender know up front if the development or project you live
in is in litigation. It is usually possible to obtain financing in such
situations, but it will limit the number of lenders who might be able to
finance your mortgage. In some cases the lender may require a higher percentage
of equity in the property and the interest rate could exceed that of standard
Should I lock my interest
rate at mortgage application or float the rate until closing?
The answer depends on one's outlook for interest
rates, whether you are satisfied with the current rate being offered (and would
not be deterred from proceeding if rates declined), when you need to close and
whether or not a rate increase could effect your ability to qualify for the
mortgage. With a purchase, there is a contractual obligation to close on a
specified date. With a refinance transaction, there is no such obligation to
close and therefore a refinance applicant could postpone closing for a more
favorable rate. Some lenders take the guesswork out of the process by allowing
borrowers to lock and then float the rate down one time during the mortgage
process. Typically a borrower is required to bring in a fee of ½-1% of
the mortgage amount which is then credited (or refunded) to them at closing. It
is a lock fee the lender requires to insure the transaction will in fact close.
Will the lender require a fee
to lock in my interest rate?
For a traditional 30-90 day rate lock, the
lender will not require the borrower to pay a lock fee, but for the privilege
of locking for a period beyond 90 days they may. Some lenders allow borrowers
to lock and then float the rate down one time during the mortgage process,
typically a borrower is required to bring in a fee of ½-1% of the
mortgage amount which is then credited (or refunded) to them at closing. It is
a lock fee the lender requires to insure the transaction will in fact close.
If I decide to lock my
interest rate and rates go down, will the lender give me the current lower
It depends upon the lender involved and how much
of a rate decline has occurred. Some lenders may re-price the mortgage at a
rate close to market if there has been a substantial rate decline (i.e. = or
>3/8%) and some may prefer that a mortgage is canceled rather than re-price
it at a market rate. Some lenders allow borrowers to lock and then float the
rate down one time during the mortgage process, typically a borrower is
required to bring in a fee of ½-1% of the mortgage amount which is then
credited (or refunded) to them at closing. It is a lock fee the lender requires
to insure the transaction will in fact close.
Is it best to pay points up
front to reduce the interest rate?
When points are paid on a mortgage, the result
is to buy down the interest rate, typically 1 point (or 1%) will buy the rate
down .25%. The key to analyzing whether paying points makes financial sense is
to determine: 1) How long do you anticipate remaining in the property? 2) When
would the breakeven point occur? For example if you pay two points to buy your
rate down from 8.00% to 7.50% on a $300,000 mortgage, the payment at 8.00%
would be $2,201 and at 7.50%, the payment would be $2,098, with the difference
in payment amounting to $103/month. With two points costing $6000, divided by
the savings of $103/month equaling 58.25 months or 4.85 years to break even.
You would want to hold the mortgage and remain in the property approximately 5
years for this to make sense. Other factors to consider are the tax
implications of paying points (see our link to the IRS website) as well as the
time value of money (could you put these funds to better use).
What is the difference
between a zero point and a no cost mortgage?
With a zero point mortgage, a borrower has opted
not to pay points to buy their interest rate down but will still be paying for
their base closing costs (i.e. appraisal, credit report, lender doc fees, title
and escrow, etc.). With a
no cost mortgage, a borrower has accepted a higher interest
rate, (typically .25%- 375% higher than on a zero point mortgage) with the
trade off that the lender or broker will pay for all their
non-recurring closing costs (all base closing fees except
for interest, taxes and insurance due).
What is APR and how is it
calculated? APR stands for annual percentage rate and its purpose is to
give borrowers a truer representation of the effective interest rate on their
mortgage. APR factors in certain closing costs and fees and spreads these costs
over the life of the mortgage, along with the note rate, to arrive at a more
accurate annualized percentage rate than the note rate alone represents.
What is a mortgage prepayment
penalty and is it generally advisable to get a mortgage that has one?
A prepayment penalty on a mortgage allows the
lender to charge a borrower additional interest, typically six months worth,
when a mortgage is repaid during the penalty period, which is usually somewhere
in the first three to five years of the mortgage. If a mortgage does have a
prepayment penalty, this is clearly stated within the mortgage disclosures,
mortgage note or prepayment penalty rider to the note. The advantage of taking
a mortgage with a prepayment penalty is that it could carry a lower rate of
interest or you may be permitted to take a mortgage without paying for
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.