There are many things to think about when you decide to get a home equity loan - also known as a second mortgage. This page will take you through the steps of the loan process, and help you gather the information you need to be successful.
More and more lenders are offering home equity lines of credit. By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please, at an interest rate that is relatively low.Furthermore, under the tax law—depending on your specific situation—you may be allowed to deduct the interest because the debt is secured by your home.
If you are in the market for credit, a home equity plan may be right for you. Or perhaps another form of credit would be better. Before making a decision, you should weigh carefully the costs of a home equity line against the benefits. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. And remember, failure to repay the amounts you’ve borrowed, plus interest, could mean the loss of your home.What is a home equity
line of credit?
A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer’s largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses.
With a home equity line, you will be approved for a specific amount of credit—your credit limit, the maximum amount you may borrow at any one time under the plan. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage. For example:
| Appraised value of home | $100,000 |
| Percentage | x 75% |
| Percentage of appraised value | = $ 75,000 |
| Less balance owed on mortgage | - $ 40,000 |
| Potential credit | $ 35,000 |
In determining your actual credit limit, the lender will also consider your ability to repay, by looking at your income, debts, and other financial obligations as well as your credit history.
Many home equity plans set a fixed period during which you can borrow money, such as 10 years. At the end of this “draw period,” you may be allowed to renew the credit line. If your plan does not allow renewals, you will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period (the “repayment period”), for example, 10 years.Once approved for a home equity line of credit, you will most likely be able to borrow up to your credit limit whenever you want. Typically, you will use special checks to draw on your line. Under some plans, borrowers can use a credit card or other means to draw on the line.
There may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line (for example, $300) and to keep a minimum amount outstanding. Some plans may also require that you take an initial advance when the line is set up.What should you look for when shopping for a plan?
If you decide to apply for a home equity line of credit, look for the plan that best meets your particular needs. Read the credit agreement carefully, and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs of establishing the plan. The APR for a home equity line is based on the interest rate alone and will not reflect the closing costs and other fees and charges, so you’ll need to compare these costs, as well as the APRs, among lenders.
Interest rate charges and related plan features
Home equity lines of credit typically involve variable rather than fixed interest rates. The variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate); the interest rate for borrowing under the home equity line changes, mirroring fluctuations in the value of the index. Most lenders cite the interest rate you will pay as the value of the index at a particular time plus a “margin,” such as 2 percentage points. Because the cost of borrowing is tied directly to the value of the index, it is important to find out which index is used, how often the value of the index changes, and how high it has risen in the past as well as the amount of the margin.
Lenders sometimes offer a temporarily discounted interest rate for home equity lines—a rate that is unusually low and may last for only an introductory period, such as 6 months.
Variable-rate plans secured by a dwelling must, by law, have a ceiling (or cap) on how much your interest rate may increase over the life of the plan. Some variable-rate plans limit how much your payment may increase and how low your interest rate may fall if interest rates drop.
Some lenders allow you to convert from a variable interest rate to a fixed rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan.Plans generally permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to draw additional funds during a period in which the interest rate reaches the cap.
Costs of establishing and maintaining a home equity line
Many of the costs of setting up a home equity line of credit are similar to those you paywhen you buy a home. For example:
In addition, you may be subject to certain fees during the plan period, such as annual membership or maintenance fees and a transaction fee every time you draw on the credit line.
You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those initial charges would substantially increase the cost of the funds borrowed. On the other hand, because the lender’s risk is lower than for other forms of credit, as your home serves as collateral, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the costs of establishing and maintaining the line. Moreover, some lenders waive some or all of the closing costs.How will you repay your home equity plan?
Regardless of the minimum required payment, you may choose to pay more, and many lenders offer a choice of payment options. Many consumers choose to pay down the principal regularly as they do with other loans. For example, if you use your line to buy a boat, you may want to pay it off as you would a typical boat loan.
Whatever your payment arrangements during the life of the plan—whether you pay some, a little, or none of the principal amount of the loan—when the plan ends you may have to pay the entire balance owed, all at once. You must be prepared to make this “balloon payment” by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose your home.
If your plan has a variable interest rate, your monthly payments may change. Assume, for example, that you borrow $10,000 under a plan that calls for interest-only payments. At a 10 percent interest rate, your monthly payments would be $83. If the rate rises over time to 15 percent, your monthly payments will increase to $125. Similarly, if you are making payments that cover interest plus some portion of the principal, your monthly payments may increase, unless your agreement calls for keeping payments the same throughout the plan period.If you sell your home, you will probably be required to pay off your home equity line in full immediately. If you are likely to sell your home in the near future, consider whether it makes sense to pay the up-front costs of setting up a line of credit. Also keep in mind that renting your home may be prohibited under the terms of your agreement.
Lines of credit vs. traditional second mortgage loansIf you are thinking about a home equity line of credit, you might also want to consider a traditional second mortgage loan. A second mortgage provides you with a fixed amount of money repayable over a fixed period. In most cases the payment schedule calls for equal payments that will pay off the entire loan within the loan period. You might consider a second mortgage instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.
In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at both the APR and other charges. Do not, however, simply compare the APRs, because the APRs on the two types of loans are figured differently:
The APR for a traditional second mortgage loan takes into account the interest rate charged plus points and other finance charges.
Disclosures from lenders
The federal Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. And in general, neither the lender nor anyone else may charge a fee until after you have received this information. You usually get these disclosures when you receive an application form, and you will get additional disclosures before the plan is opened. If any term (other than a variable-rate feature) changes before the plan is opened, the lender must return all fees if you decide not to enter into the plan because of the change.
When you open a home equity line, the transaction puts your home at risk. If the home involved is your principal dwelling, the Truth in Lending Act gives you 3 days from the day the account was opened to cancel the credit line. This right allows you to change your mind for any reason. You simply inform the lender in writing within the 3-day period. The lender must then cancel its security interest in your home and return all fees—including any application and appraisal fees—paid to open the account.
203(b): FHA program which provides mortgage insurance to protect lenders from default; used to finance the purchase of new or existing one- to four family housing; characterized by low down payment, flexible qualifying guidelines, limited fees, and a limit on maximum loan amount.
203(k): this FHA mortgage insurance program enables homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan.
Adjustable-rate mortgage (ARM): A mortgage for which the interest rate is not fixed, but changes during the life of the loan in line with movements in an index rate. You may also see ARMs referred to as AMLs (adjustable-mortgage loans) or VRMs (variable-rate mortgages).
Amenity: a feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use; may be natural (like location, Woods, water) or man-made (like a swimming pool or garden).
Amortization: repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years)
Annual membership or maintenance fee: An annual charge for having the line of credit available. Charged regardless of whether or not the line is used.
Annual percentage rate (APR): A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders follow the same rules when calculating the APR, it provides consumers with a good basis for comparing the cost of loans, including mortgages.
Annual Percentage Rate (APR): calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.
Annual percentage rate (APR): The cost of credit on a yearly basis expressed as a percentage.
Application fee: Fees that are paid upon application. May include charges for property appraisal and a credit report.
Application: the first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
Appraisal: a document that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
Appraiser: a qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.
ARM: Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap.
Assessor: a government official who is responsible for determining the value of a property for the purpose of taxation.
Assumable mortgage: a mortgage that can be transferred from a seller to a buyer; once the loan is assumed by the buyer the seller is no longer responsible for repaying it; there may be a fee and/or a credit package involved in the transfer of an assumable mortgage.
Balloon Mortgage: a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.
Balloon payment: A lump-sum payment that may be required when the plan ends.
Bankruptcy: a federal law Whereby a person's assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.
Borrower: a person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.
Budget: a detailed record of all income earned and spent during a specific period of time.
Building code: based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building.
Buydown: With a buydown, the seller pays an amount to the lender so that the lender can give you a lower rate and lower payments, usually for an early period in an ARM. The seller may increase the sales price to cover the cost of the buydown. Buydowns can occur in all types of mortgages, not just ARMs.
Cap: A limit on how much the interest rate or the monthly payment may change, either at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning, so they may cause negative amortization.
Cap: a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.
Cash reserves: a cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.
Certificate of title: a document provided by a qualified source (such as a title company) that shows the property legally belongs to the current owner; before the title is transferred at closing, it should be clear and free of all liens or other claims.
Closing costs: customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.
Closing costs: Fees paid at closing, including attorneys fees, fees for preparing and filing a mortgage, fees for title search, taxes, and insurance.
Closing: also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.
Commission: an amount, usually a percentage of the property sales price, that is collected by a real estate professional as a fee for negotiating the transaction..
Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex; the owner also shares financial responsibility for common areas.
Conventional loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.
Conversion clause: A provision in some ARMs that allows you to change the ARM to a fixed-rate loan at some point during the term. Conversion is usually allowed at the end of the first adjustment period. At the time of the conversion, the new fixed rate is generally set at one of the rates then prevailing for fixed-rate mortgages. The conversion feature may be available at extra cost.
Cooperative (Co-op): residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.
Credit bureau score: a number representing the possibility a borrower may default; it is based upon credit history and is used to determine ability to qualify for a mortgage loan.
Credit history: history of an individual's debt payment; lenders use this information to gauge a potential borrower's ability to repay a loan.
Credit limit: The maximum amount that may be borrowed under the home equity plan.
Credit report: a record that lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.
Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.
Deed: the document that transfers ownership of a property.
Deed-in-lieu: to avoid foreclosure ("in lieu" of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process doesn't allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.
Default: the inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement.Discount point: normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan.
Discount: In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to give you a lower rate and lower payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate will probably go up depending on the index rate.
Down payment: the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.
Earnest money: money put down by a potential buyer to show that he or she is serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.
EEM: Energy Efficient Mortgage; an FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase.
Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property.
Equity: The difference between the fair market value (appraised value) of the home and the outstanding mortgage balance.
Escrow account: a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.
Fair Housing Act: a law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability.
Fair market value: the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.
Fannie Mae: Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.
FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
Fixed-rate mortgage: a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Flood insurance: insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.
Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders With funds for new homebuyers.
Ginnie Mae: Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as With Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.
Good faith estimate: an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.
HELP: Homebuyer Education Learning Program; an educational program from the FHA that counsels people about the homebuying process; HELP covers topics like budgeting, finding a home, getting a loan, and home maintenance; in most cases, completion of the program may entitle the homebuyer to a reduced initial FHA mortgage insurance premium-from 2.25% to 1.75% of the home purchase price.
Home inspection: an examination of the structure and mechanical systems to determine a home's safety; makes the potential homebuyer aware of any repairs that may be needed.
Home warranty: offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance; coverage extends over a specific time period and does not cover the home's structure.
Homeowner's insurance: an insurance policy that combines protection against damage to a dwelling and Is contents with protection against claims of negligence )r inappropriate action that result in someone's injury or )property damage.
Housing counseling agency: an agency that provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and homebuying.
HUD: the U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.
HUD1 Statement: also known as the "settlement sheet," it itemizes all closing costs; must be given to the borrower at or before closing.
HVAC: Heating, Ventilation and Air Conditioning; a home's heating and cooling system.
Index. a measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage or home equity line of credit.
Inflation: the number of dollars in circulation exceeds the amount of goods and services available for purchase; inflation results in a decrease in the dollar's value.
Insurance: protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.
Interest rate: the amount of interest charged on a monthly loan payment; usually expressed as a percentage.
Judgment: a legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor's claim by providing a collateral source.
Lease purchase: assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.
Lien: a legal claim against property that must be satisfied When the property is sold.
Loan fraud: purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.
Loan: money borrowed that is usually repaid with interest.
Loan-to-value (LTV) ratio: a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
Lock-in: since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.
Loss mitigation: a process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan
Margin: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.
Margin: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Margin: The number of percentage points the lender adds to the index rate to determine the annual percentage rate.
Minimum payment: The minimum amount that you must pay (usually monthly) on your account. Under some plans, the minimum payment may cover interest only; under others, it may include both principal and interest.
Mortgage banker: a company that originates loans and resells them to secondary mortgage lenders like :Fannie Mae or Freddie Mac.
Mortgage broker: a firm that originates and processes loans for a number of lenders.
Mortgage insurance premium (MIP): a monthly payment -usually part of the mortgage payment - paid by a borrower for mortgage insurance.
Mortgage insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price.
Mortgage Modification: a loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.
Mortgage: a lien on the property that secures the Promise to repay a loan.
Negative Amortization: Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all the interest cost. The interest cost that isn’t covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.
Offer: indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing.
Origination fee: the charge for originating a loan; is usually calculated in the form of points and paid at closing.
Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.
Partial Claim: a loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.
PITI: Principal, Interest, Taxes, and Insurance - the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
PMI: Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
Points: One point is equal to 1 percent of the principal amount of your mortgage. For example, if the mortgage is for $65,000, one point equals $650. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to increase the yield on the mortgage and to cover loan closing costs. These points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.
Pre-approve: lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
Pre-foreclosure sale: allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.
Premium: an amount paid on a regular schedule by a policyholder that maintains insurance coverage.
Prepayment: payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.
Pre-qualify: a lender informally determines the maximum amount an individual is eligible to borrow.
Principal: the amount borrowed from a lender; doesn't include interest or additional fees.
Radon: a radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.
Real estate agent: an individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.
REALTOR: a real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS, and its local and state associations.
Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
Rehabilitation mortgage: a mortgage that covers the costs of rehabilitating (repairing or Improving) a property; some rehabilitation mortgages - like the FHA's 203(k) - allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.
RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships
Security interest: An interest that a lender takes in the borrower’s property to ensure repayment of a debt.
Settlement: another name for closing .
Special Forbearance: a loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.
Subordinate: to place in a rank of lesser importance or to make one claim secondary to another.
Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.
Sweat equity: using labor to build or improve a property as part of the down payment
Title 1: an FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title I loans less than $7,500 don't require a property lien.
Title insurance: insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers.
Title search: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.
Transaction fee: A fee charged each time you draw on your credit line.
Truth-in-Lending: a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.
Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit history and a judgment of the property value.
VA: Department of Veterans Affairs: a federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.
Variable rate: An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.
When you’re looking for a mortgage, you’re likely to shop among lenders for the most favorable interest rate, and the lowest points and other up-front charges. When you find the most favorable terms and the lender that you want, you’ll apply to that lender. But when you get to settlement, will you actually receive the terms you applied or bargained for? Or will you find that the rate has changed -- and that your costs have gone up?
Lock-ins on rates and points might offer you a way to ensure that what you shop for is what you get. This brochure explains what these arrangements mean.
In most cases, the terms you are quoted when you shop among lenders only represent the terms available to borrowers settling their loan agreement at the time of the quote. The quoted terms may not be the terms available to you at settlement weeks or even months later. Therefore, you should not rely on the terms quoted to you when shopping for a loan unless a lender is willing to offer a lock-in.
A lock-in, also called a rate-lock or rate commitment, is a lender’s promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. (Points are additional charges imposed by the lender that are usually prepaid by the consumer at settlement but can sometimes be financed by adding them to the mortgage amount. One point equals one percent of the loan amount.) Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.
A lock-in that is given when you apply for a loan may be useful because it’s likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application. During that time, the cost of mortgages may change. But if your interest rate and points are locked in, you should be protected against increases while your application is processed. This protection could affect whether you can afford the mortgage. However, a locked-in rate could also prevent you from taking advantage of price decreases, unless your lender is willing to lock in a lower rate that becomes available during this period.
It is important to recognize that a lock-in is not the same as a loan commitment, although some loan commitments may contain a lock-in. A loan commitment is the lender’s promise to make you a loan in a specific amount at some future time. Generally, you will receive the lender’s commitment only after your loan application has been approved. This commitment usually will state the loan terms that have been approved (including loan amount), how long the commitment is valid, and the lender’s conditions for making the loan such as receipt of a satisfactory title insurance policy protecting the lender.
Some lenders have preprinted forms that set out the exact terms of the lock-in agreement. Others may only make an oral lock-in promise on the telephone or at the time of application. Oral agreements can be very difficult to prove in the event of a dispute.
Some lenders' lock-in forms may contain crucial information that is difficult to understand or that is in fine print. For example, some lock-in agreements may become void through some unrelated action such as a change in the maximum rate for Veterans Administration guaranteed loans. Thus, it is wise to obtain a blank copy of a lender’s lock-in form to read carefully before you apply for a loan. If possible, show the lock-in form to a lawyer or real estate professional.
It is wise to obtain written, rather than verbal, lock-in agreements to make sure that you fully understand how your lender’s lock-ins and loan commitments work and to have a tangible record of your arrangements with the lender. This record may be useful in the event of a dispute.
Lenders may charge you a fee for locking in the rate of interest and number of points for your mortgage. Some lenders may charge you a fee up-front, and may not refund it if you withdraw your application, if your credit is denied, or if you do not close the loan. Others might charge the fee at settlement. The fee might be a flat fee, a percentage of the mortgage amount, or a fraction of a percentage point added to the rate you lock in. The amount of the fee and how it is charged will vary among lenders and may depend on the length of the lock-in period.
Because practices vary, you may want to ask your lender whether there are other options available to you.
Usually the lender will promise to hold a certain interest rate and number of points for a given number of days, and to get these terms you must settle on the loan within that time period. Lock-ins of 30 to 60 days are common. But some lenders may offer a lock-in for only a short period of time (for example, 7 days after your loan is approved) while some others might offer longer lock-ins (up to 120 days). Lenders that charge a lock-in fee may charge a higher fee for the longer lock-in period. Usually, the longer the period, the greater the fee.
The lock-in period should be long enough to allow for settlement, and any other contingencies imposed by the lender, before the lock-in expires. Before deciding on the length of the lock-in to ask for, you should find out the average time for processing loans in your area and ask your lender to estimate (in writing, if possible) the time needed to process your loan. You’ll also want to take into account any factors that might delay your settlement. These may include delays that you can anticipate in providing materials about your financial condition and, in case you are purchasing a new house, unanticipated construction delays. Finally, ask for a lock-in with as few contingencies as possible.
If you don’t settle within the lock-in period, you might lose the interest rate and the number of points you had locked in. This could happen if there are delays in processing whether they are caused by you, others involved in the settlement process, or the lender. For example, your loan approval could be delayed if the lender has to wait for any documents from you or from others such as employers, appraisers, termite inspectors, builders, and individuals selling the home. On occasion, lenders are themselves the cause of processing delays, particularly when loan demand is heavy. This sometimes happens when interest rates fall suddenly.
If your lock-in expires, most lenders will offer the loan based on the prevailing interest rate and points. If market conditions have caused interest rates to rise, most lenders will charge you more for your loan. One reason why some lenders may be unable to offer the lock-in rate after the period expires is that they can no longer sell the loan to investors at the lock-in rate. (When lenders lock in loan terms for borrowers, they often have an agreement with investors to buy these loans based on the lock-in terms. That agreement may expire around the same time that the lock-in expires and the lender may be unable to afford to offer the same terms if market rates have increased.) Lenders who intend to keep the loans they make may have more flexibility in those cases where settlement is not reached before the lock-in expires.
While the lender has the greatest role in how fast your loan application is processed, there are certain things you can do to speed up its approval. Try to find out what documentation the lender will require from you.
Much of the information required by your lender can be brought with you when you apply for a loan. This may help to get your application moving more quickly through the process. When you first meet with your lender, be sure to bring the following documents:
Be sure to respond promptly to your lender’s requests for information while your loan is being processed. It is also a good idea to call the lender and real estate agent from time to time. By calling occasionally, you can check on the status of your application, and offer to help contact others such as employers who may need to provide documents and other information for your loan. It is also helpful to keep notes on your contacts with the lender so that you will have a record of your conversations.
When you’re ready to settle on your loan, you’ll want to get the loan terms that you’ve locked in. To increase that likelihood, it is important to learn as much as you can about what the lender is promising you before you apply for a loan. Ask for the following information when you shop for a loan:
Knowing what to look for puts you in a better position to decide whether, when, and how long to lock in mortgage terms. Also, by helping to keep the loan process moving, you can lessen the chance that your lock-in will run out before settlement.
But what if your lock-in does lapse? If you believe that the lapse was due to delays caused by the lender or someone else involved in the loan process, you should try first to reach a mutually satisfactory agreement with the lender. If that effort fails, consider writing to the appropriate state or federal regulatory agency.
Some lender actions, such as offering lock-in terms which are impossible to fulfill, failing to process your loan diligently, or causing your lock-in to expire are improper-and may even be illegal. In addition, because you may have contractual rights under your lock-in or loan commitment, you may want to consult with an attorney. Be aware, though, that complaints may not be resolved as quickly as may be necessary for a home purchase.
Depending upon their authority under applicable state or federal law, regulatory agencies may either attempt to help you resolve your complaint directly or record your complaint and recommend other action.
The mortgage application process requires considerable paperwork. First there is the application form, which asks for detailed information about you, your employment record, the house you want to purchase, etc. The lender will need documentation pertaining to your personal finances--your earnings, your monthly expenses, and your debts--to help gauge your willingness and ability to repay the mortgage.
Lenders also will examine your file at the credit bureau to learn if you pay your bills on time. A lender may reject your application if the report shows that you have a poor credit history. Thus, you may want to make sure your credit file is accurate before you apply for your mortgage. You have a right to know what information is contained in your credit report and to have someone from the credit bureau help you understand what the report says. The names of credit bureaus can be found in the phone book.
You can prepare for questions about your financial condition by using the worksheets in this brochure. Worksheet 1 helps determine how much money you might have available for a monthly payment--just list all items of income and payments required on debts that won’t be paid off within ten months. There’s also a place for the estimated mortgage payment quoted by the lender.
To figure the mortgage payment, the lender will begin by asking how much you want to borrow. The maximum loan amount will be determined by the value of the property and your personal financial condition. To estimate the value of the property, the lender will ask a real estate appraiser to give an opinion about its value. The appraiser’s opinion can be an important factor in determining whether you qualify for the size of mortgage you want. Lenders usually will lend the borrower up to a certain percentage of the appraised value of the property, such as 80 or 90 percent, and will expect a down payment making up the difference. If the appraisal is below the asking price of the home, the down payment you planned to make and the amount the lender is willing to lend you may not be enough to cover the purchase price. In that case, the lender may suggest a larger down payment to make up the difference between the price of the house and its appraised value.
When looking at your projected mortgage payment and existing debt, some lenders might use ratios such as "28 and 36" to determine whether you qualify for the loan. These are commonly used ratios.
In the case of "28 and 36," the 28 refers to the percentage of your gross income (before taxes) that may be spent on housing expenses, including principal and interest on the mortgage, real estate taxes, and insurance. The 36 refers to the income that may be spent for payments on all your debts (including the mortgage): the monthly payments on your outstanding debts, when added to the monthly housing expenses, may not exceed 36 percent of your gross income. When you talk to a lender, find out what ratios will be used to evaluate your application. Then use Worksheet 2 to calculate whether you are within the lender's guidelines.
Be prepared to provide certain documentation about your income (W2s for prior years and year-to-date pay stubs), current debts (account number, outstanding balance, and creditor’s address for each), and the purchase contract for the home you want to buy. When you file your application, ask the lender how long the approval process will take. The time may vary depending on the complexity of your mortgage, current market conditions, and whether you have to provide additional information. It’s common for a decision to be made within 30 days after the lender receives all the necessary information. Applications for FHA or VA loans may take longer.
If your application is turned down, federal law requires the lender to tell you, in writing, the specific reasons for the denial. Make sure you understand the reasons given--you may be able to find answers or alternatives that will satisfy the institution’s lending standards. Even if that doesn’t happen, understanding fully why the loan was denied may improve your chances with the next lender you visit. Factors that may affect the loan decision include:
Credit history
Is the lender doubtful--because of your level of debt or credit history--about your ability to make the monthly payment? Ask how your debt ratios compare to the lender’s standards. If there were special circumstances surrounding old credit problems, ask for a chance to explain.
Generally speaking, a mortgage is a loan obtained to purchase real estate. The "mortgage" itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.
The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay,$2,500 as a down payment.
The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require mortgage insurance policy.
Fixed Rate Mortgages: Payments remain the same for the the life of the loan
Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits
An ARM may make sense If you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.
Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.
Yes. Lenders now offer several affordable mortgage options which can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.
There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and - possibly -repairs and decorating.
The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).
The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.
A lower interest rate allows you to borrow more money than a high rate with the some monthly payment. Interest rates can fluctuate as you shop for a loan, so ask-lenders if they offer a rate "lock-in"which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.
If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.
Discount points allow you to lower your interest rate. They are essentially prepaid interest, With each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases With each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property tax or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.
The first step in securing a loan is to complete a loan application. To do so, you'll need the following information.
During the application process, the lender will order a report on your credit history and a professional appraisal of the property you want to purchase. The application process typically takes between 1-6 weeks.
Choose your lender carefully. Look for financial stability and a reputation for customer satisfaction. Be sure to choose a company that gives helpful advice and that makes you feel comfortable. A lender that has the authority to approve and process your loan locally is preferable, since it will be easier for you to monitor the status of your application and ask questions. Plus, it's beneficial when the lender knows home values and conditions in the local area. Do research and ask family, friends, and your real estate agent for recommendations.
Pre-qualification is an informal way to see how much you maybe able to borrow. You can be 'pre-qualified' over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.
Pre-approval is a lender's actual commitment to lend to you. It involves assembling the financial records mentioned in Question 47 (Without the property description and sales contract) and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.
There are three major credit reporting companies: Equifax, Experian, and Trans Union. Obtaining your credit report is as easy as calling and requesting one. Once you receive the report, it's important to verify its accuracy. Double check the "high credit limit,"'total loan," and 'past due" columns. It's a good idea to get copies from all three companies to assure there are no mistakes since any of the three could be providing a report to your lender. Fees, ranging from $5-$20, are usually charged to issue credit reports but some states permit citizens to acquire a free one. Contact the reporting companies at the numbers listed for more information.
| Company Name | Phone Number |
| Experian | 1-888-524-3666 |
| Equifax | 1-800-685-1111 |
| Trans Union | 1-800-916-8800 |
Simple mistakes are easily corrected by writing to the reporting company, pointing out the error, and providing proof of the mistake. You can also request to have your own comments added to explain problems. For example, if you made a payment late due to illness, explain that for the record. Lenders are usually understanding about legitimate problems.
A credit bureau score is a number, based upon your credit history, that represents the possibility that you will be unable to repay a loan. Lenders use it to determine your ability to qualify for a mortgage loan. The better the score, the better your chances are of getting a loan. Ask your lender for details.
There are no easy ways to improve your credit score, but you can work to keep it acceptable by maintaining a good credit history. This means paying your bills on time and not overextending yourself by buying more than you can afford.
Your personal situation will determine the best kind of loan for you. By asking yourself a few questions, you can help narrow your search among the many options available and discover which loan suits you best.
Your lender can help you use your answers to questions such as these to decide which loan best fits your needs.
First, devise a checklist for the information from each lending institution. You should include the company's name and basic information, the type of mortgage, minimum down payment required, interest rate and points, closing costs, loan processing time, and whether prepayment is allowed.
Speak with companies by phone or in person. Be sure to call every lender on the list the same day, as interest rates can fluctuate daily. In addition to doing your own research, your real estate agent may have access to a database of lender and mortgage options. Though your agent may primarily be affiliated with a particular lending institution, he or she may also be able to suggest a variety of different lender options to you.
Yes. When you turn in your application, you'll be required to pay a loan application fee to cover the costs of underwriting the loan. This fee pays for the home appraisal, a copy of your credit report, and any additional charges that may be necessary. The application fee is generally non-refundable.
RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose information to potential customers throughout the mortgage process, By doing so, it protects borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing and escrow account practices, and business relationships between closing service providers and other parties to the transaction.
For more information click RESPA, or call 1-800-569-4287 for a local counseling referral.
It's an estimate that lists all fees paid before closing, all closing costs, and any escrow costs you will encounter when purchasing a home. The lender must supply it within three days of your application so that you can make accurate judgments when shopping for a loan.
Lenders are not allowed to discriminate in any way against potential borrowers. If you believe a lender is refusing to provide his or her services to you on the basis of race, color, nationality, religion, sex, familial status, or disability, contact HUD's Office of Fair Housing at 1-800-669-9777 (or 1-800-927-9275 for the hearing impaired).
It usually takes a lender between 1-6 weeks to complete the evaluation of your application. Its not unusual for the lender to ask for more information once the application has been submitted. The sooner you can provide the information, the faster your application will be processed. Once all the information has been verified the lender will call you to let you know the outcome of your application. If the loan is approved, a closing date is set up and the lender will review the closing with you. And after closing, you'll be able to move into your new home.
This will likely be the first opportunity to examine the house without furniture, giving you a clear view of everything. Check the walls and ceilings carefully, as well as any work the seller agreed to do in response to the inspection. Any problems discovered previously that you find uncorrected should be brought up prior to closing. It is the seller's responsibility to fix them.
There may be closing cost customary or unique to a certain locality, but closing cost are usually made up of the following:
You'll present your paid homeowner's insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc.) and then the money the seller owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proofs of any inspection, warranties, etc.
Once you're sure you understand all the documentation, you'll sign the mortgage, agreeing that if you don't make payments the lender is entitled to sell your property and apply the sale price against the amount you owe plus expenses. You'll also sign a mortgage note, promising to repay the loan. The seller will give you the title to the house in the form of a signed deed.
You'll pay the lender's agent all closing costs and, in turn,he or she will provide you with a settlement statement of all the items for which you have paid. The deed and mortgage will then be recorded in the state Registry of Deeds, and you will be a homeowner.
Also known as HUD, the U.S. Department of Housing and Urban Development was established in 1965 to develop national policies and programs to address housing needs in the U.S. One of HUD's primary missions is to create a suitable living environment for all Americans by developing and improving the country's communities and enforcing fair housing laws
HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD plays a large role in homeownership by making loans available for lower- and moderate-income families through its FHA mortgage insurance program and its HUD Homes program. HUD owns homes in many communities throughout the U.S. and offers them for sale at attractive prices and economical terms. HUD also seeks to protect consumers through education, Fair Housing Laws, and housing rehabilitation initiatives.
Now an agency within HUD, the Federal Housing Administration was established in 1934 to advance opportunities for Americans to own homes. By providing private lenders with mortgage insurance, the FHA gives them the security they need to lend to first-time buyers who might not be able to qualify for conventional loans. The FHA has helped more than 26 million Americans buy a home.
The FHA works to make homeownership a possibility for more Americans. With the FHA, you don't need perfect credit or a high-paying job to qualify for a loan. The FHA also makes loans more accessible by requiring smaller down payments than conventional loans. In fact, an FHA down payment could be as little as a few months rent. And your monthly payments may not be much more than rent.
Lender claims paid by the FHA mortgage insurance program are drawn from the Mutual Mortgage Insurance fund. This fund is made up of premiums paid by FHA-insured loan borrowers. No tax dollars are used to fund the program.
anyone who meets the credit requirements, can afford the mortgage payments and cash investment, and who plans to use the mortgaged property as a primary residence may apply for an FHA-insured loan.
FHA loan limits vary throughout the country, from $115,200 in low-cost areas to $208,800 in high-cost areas. The loan maximums for multi-unit homes are higher than those for single units and also vary by area.
Because these maximums are linked to the conforming loan limit and average area home prices, FHA loan limits are periodically subject to change. Ask your lender for details and confirmation of current limits.
With the exception of a few additional forms, the FHA loan application process is similar to that of a conventional loan (see Question 47). With new automation measures, FHA loans may be originated more quickly than before. And, if you don't prefer a face-to-face meeting, you can apply for an FHA loan via mail, telephone, the Internet, or video conference.
There is no minimum income requirement. But you must prove steady income for at least three years, and demonstrate that you've consistently paid your bills on time.
Seasonal pay, child support, retirement pension payments, unemployment compensation, VA benefits, military pay, Social Security income, alimony, and rent paid by family all qualify as income sources. Part-time pay, overtime, and bonus pay also count as long as they are steady. Special savings plans-such as those set up by a church or community association - qualify, too. Income type is not as important as income steadiness with the FHA.
Yes. Short-term debt doesn't count as long as it can be paid off within 10 months. And some regular expenses, like child care costs, are not considered debt. Talk to your lender or real estate agent about meeting the FHA debt-to-income ratio.
The FHA allows you to use 29% of your income towards housing costs and 41% towards housing expenses and other long-term debt. With a conventional loan, this qualifying ratio allows only 28% toward housing and 36% towards housing and other debt
You may qualify to exceed if you have:
You must have a down payment of at least 3% of the purchase price of the home. Most affordable loan programs offered by private lenders require between a 3%-5% down payment, with a minimum of 3% coming directly from the borrower's own funds.
Besides your own funds, you may use cash gifts or money from a private savings club. If you can do certain repairs and improvements yourself, your labor may be used as part of a down 8 payment (called -sweat equity"). If you are doing a lease purchase, paying extra rent to the seller may also be considered the same as accumulating cash.
The FHA is generally more flexible than conventional lenders in its qualifying guidelines. In fact, the FHA allows you to re-establish credit if:
Yes. If you prefer to pay debts in cash or are too young to have established credit, there are other ways to prove your eligibility. Talk to your lender for details.
Except for the addition of an FHA mortgage insurance premium, FHA closing costs are similar to those of a conventional loan outlined in Question 63. The FHA requires a single, upfront mortgage insurance premium equal to 2.25% of the mortgage to be paid at closing (or 1.75% if you complete the HELP program- see Question 91). This initial premium may be partially refunded if the loan is paid in full during the first seven years of the loan term. After closing, you will then be responsible for an annual premium - paid monthly - if your mortgage is over 15 years or if you have a 15-year loan with an LTV greater than 90%.
No. Though you can't roll closing costs into your FHA loan, you may be able to use the amount you pay for them to help satisfy the down payment requirement. Ask your lender for details.
Yes. You can assume an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, since the process is streamlined and less expensive compared to that for a new loan. Also, assuming a loan can often result in a lower interest rate. The application process consists basically of a credit check and no property appraisal is required. And you must demonstrate that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new one.
Call or, write to your lender as soon as possible. Clearly explain the situation and be prepared to provide him or her with financial information.
Yes. Talk to your lender or a HUD-approved counseling agency for details. Listed below are a few options that may help you get back on track.
Talk to your lender about specific loss mitigation options. Work directly with him or her to request a "workout packet." A secondary lender, like Fannie Mae or Freddie Mac, may have purchased your loan. Your lender can follow the appropriate guidelines set by Fannie or Freddie to determine the best option for your situation.
Fannie Mae does not deal directly with the borrower. They work with the lender to determine the loss mitigation program that best fits your needs.
Freddie Mac, like Fannie Mae, will usually only work with the loan servicer. However, if you encounter problems with your lender during the loss mitigation process, you can coil customer service for help at 1-800-FREDDIE (1-800-373-3343).
In any loss mitigation situation, it is important to remember a few helpful hints:
- Equity skimming: a buyer offers to repay the mortgage or sell the property if you sign over the deed and move out.
- Phony counseling agencies: offer counseling for a fee when it is often given at no charge.
Mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages. It's required primarily for borrowers making a down payment of less than 20%.
Like home or auto insurance, mortgage insurance requires payment of a premium, is for protection against loss, and is used in the event of an emergency. If a borrower can't repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the total losses.
You need mortgage insurance only if you plan to make a down payment of less than 20% of the purchase price of the home. The FHA offers several loan programs that may meet your needs. Ask your lender for details.
Ask your real estate agent or lender for information on the HELP program from the FHA. HELP - Homebuyer Education Learning Program - is structured to help people like you begin the homebuying process. It covers such topics as budgeting, finding a home, getting a loan, and home maintenance. In most cases, completion of this program may entitle you to a reduction in the initial FHA mortgage insurance premium from 2.25% to 1.75% of the purchase price of your new home.
PMI stands for Private Mortgage Insurance or Insurer. These are privately-owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. PMI's usually have stricter qualifying ratios and larger down payment requirements than the FHA, but their premiums are often lower and they insure loans that exceed the FHA limit.
This is the most commonly used FHA program. It offers a low down payment, flexible qualifying guidelines, limited lender's fees, and a maximum loan amount.
This is a loan that enables the homebuyer to finance both the purchase and rehabilitation of a home through a single mortgage. A portion of the loan is used to pay off the seller's existing mortgage and the remainder is placed in an escrow account and released as rehabilitation is completed. Basic guidelines for 203(k) loans are as follows:
The Energy Efficient Mortgage allows a homebuyer to save future money on utility bills. This is done by financing the cost of adding energy-efficiency features to a new or existing home as part of an FHA-insured home purchase. The EEM can be used with both 203(b) and 203(k) loans. Basic guidelines for EEMs are as follows:
Given by a Lender and insured by the FHA, a Title I loan is used to make non-luxury renovations and repairs to a home. It offers a manageable interest rate and repayment schedule. Loans are limited to between $5,000 and 20,000. If the loan amount is under 7,500, no lien is required against your home. Ask your lender for details.
The FHA also insures loans for the purchase or rehabilitation of manufactured housing, condominiums, and cooperatives. It also has special programs for urban areas, disaster victims, and members of the armed forces. Insurance for ARMS is also available from the FHA.
If your loan amount is more than the conforming loan limits, your loan interest rate might increase. The conforming loan limits are set by federal agencies and adjusted every year. Currently, the limit is $320,000 - so if your loan amount (not home value amount) is more than that, you will likely pay a somewhat higher interest rate.
When determining an interest rate, a mortgage company must consider different types of risk. One type of risk is the likelihood that a particular borrower will pay back the loan in a timely manner. This is where a good credit history can be important; if you credit is less than perfect, you may get a higher interest rate or have to pay more closing costs. Another important factor is debt to income ratio. A borrower with a high level of debt is seen as statistically more likely to default on loan payments. The added risk for this type of situation means the lending institution will need to charge a higher interest rate.
Another type of risk is the anticipated future market interest rate fluctuations. When making long term loans, a lending institution must try to anticipate what might happen with the market interest rate over the lifetime of a loan. The longer the loan, the greater the uncertainty about what may happen to rates over the period of the loan. One way to secure a lower interest rate is to choose a shorter term loan, such as a 15 or 20 year payback period. Mortgage companies can generally give a lower interest rate for these loans, because there is a shorter period of time for market interest rates to fluctuate.
Home purchases made with little or no down payment are also seen as riskier by lending institutions. If a borrower were to default on a loan where there is no equity, then the bank is more likely to lose money through the foreclosure process. This added risk corresponds to higher interest rates for loans with a low down payment. So the best rates can be obtained with a minimum 20% down.
One more thing to keep in mind when looking for the best interest rate is closing costs. Many mortgage companies have started paying some or all loan closing costs in order to attract customers. But you actually end up paying those costs through a slight increase in interest rate.
Debt to income ratio will also have an affect on your interest rate. If you have a lot of debt, you may be seen as a riskier prospect, and therefore you will get a higher interest rate. Try to pay off all other debt in order to get the best possible home mortgage rate.
As there are many types of borrowers with different needs, mortgage lenders have created many loan programs to try to meet those needs. Here are some of the most common types.
Conventional loans
This has been the most popular loan type, and is most useful if you think you are going to stay in your home for a long period of time (at least five years). A conventional loan usually requires at least a 10% down payment.
If you are going to buy your first home, it can often be difficult to save a significant down payment. There are a number of loan programs specifically tailored for this situation. One government program is administered by the Federal Housing Administration and is known as an FHA loan. The FHA actually guarantees this type of loan, so that lenders get paid back if the borrower defaults. FHA loans can require only a 3% down payment, or possibly even less. FHA loans have limitations on size, and are more expensive because they require mortgage insurance, which adds to the overall cost of the loan. With FHA loans, many of the closing costs (including the initial mortgage insurance premium) can be added to the loan amount, reducing the need for more cash at purchase time.
Many conventional loans require that down payment funds come from income savings or from the sale of another property. These programs often require proof of the source of down payment funds. An FHA loan allows gift funds to be use for the down payment, and no verification of source is required. The source of the donor is restricted to family members and a few types of organizations.
Conventional loans (continued)
Mortgage insurance for FHA loans currently require a 1.5% premium to be paid at purchase time, and a renewal premium of 0.5% every year of the loan term. On a non-FHA conventional loan, the mortgage insurance premium can be as low as 0.5% and renewals as low as 0.3% during the loan term. If the down payment is large enough, mortgage insurance may not be required at all. Many borrowers will pay mortgage insurance for the first few years of the loan, but when enough equity has accumulated, they will re-finance their loan in order to stop paying the mortgage insurance renewal.
Veterans Administration Loan. If you are a veteran you may qualify for a Veterans Administration (VA) loan. VA loans require no down payment inmost cases, and you don’t have to pay a monthly mortgage insurance premium. Many mortgage lenders are prepared to help you get a VA loan.