Here is a first draft of a Mortgage FAQ. I tried to lay things out in the order of the mortgage process. It has a way to go, but this should get the ball rolling anyway. Please contribute to fill in the blanks, or correct any errors, of which I am sure there are many. Right now the info is more geared for newbies, but hopefully as it grows, we can get some better nuggets of widsom in here.
Mortgage FAQ
Credit Score, Inquiries. Credit scores play a significant role in your ability to get a mortgage. The first step when looking for a mortgage should be to check your own credit. You want to know what is on there, and what your score is before you apply for any mortgage. The more you put down, or equity you have in a home, the less a mortgage lender is concerned about credit score. Hard inquiries can bring your credit score down, but don't be afraid to shop around. All mortgage inquiries within a 30 day period should be counted as one inquiry.
Pre-approval When looking to purchase a home, you can get a lender to pre-approve your mortgage. This means that the lender has approved a mortgage for you, for a specified amount. This looks very favorable to the home seller, as your offer will not be contigent upon financing. Thus if a seller is presented with two similar offers, in which one is pre-approved (perhaps with a lower offer amount) and the other isn't pre-approved, the pre-approved buyer would look more appealing to the seller. This is because the seller knows you the pre-approved buyer can get the financing needed, so the offer wouldn't be contingent upon buyer obtaining financing. The point being, getting pre-approved costs nothing (or close to nothing), and it adds value to your offer.
Pre-qualify Pre-qualification should not be confused with pre-approval. Being pre-qualified, adds little if any value to a purchase offer. Being pre-qualified means that somebody ran some rough numbers and you SHOULD be able to qualify for a loan for a specified amount. However, there is no commitment from a lender like there is with a pre-approval.
Good Faith Estimates (GFE). (point out that GFE’s can be manipulated to make it look like they have fewer closing costs. i.e. using only 1 day of pre-paids.)
Points? Origination Fees, Discount Fees.
Buy Down.
What are Closing Costs?
No closing cost loan? The no closing cost loan works by giving you negative buy-down points. So by in exchange for a higher interest rate, money is rebated back to you, in the amount to cover the closing costs. This is a great tool for re-financing. Your rate may be .5% higher, but it cost you nothing to do it. If rates drop further, do it again. Frequent re-financing would be cost prohibitive if you were paying closing costs each time.
No out of pocket cost? This simply means that the lender is taking some of the equity in your home to pay closing costs. For example, if you owe $80k on a mortgage, and you re-fi it, your new loan will be $83k (assuming $3k in closing costs). Less scrupulous brokers or lenders may try to make it sound like the mortgage wont cost you anything, but in reality you are just paying for it with your home equity instead of out of pocket. Not to be confused with the no closing cost loan.
Interest Rate vs. APR The interest rate is simply the percentage of the loan amount that you are charged per year to finance the loan. The Annual Percentage Rate, or APR, starts with the interest rate and then adds in other costs such as points and other fees that, along with interest, are called "finance charges". Generally, APRs are higher than Interest Rates because all finance charges, not just interest, are used to calculate the APR. The APR for ARM's is a little tricky, because it needs to take into acount the adjustments the interest rate will take in the future. To do this, they calculate what the interest rate would adjust to based on todays index rate. This usually results in a downward adjustment. Thus for ARM's, it is not uncommon to see an APR that is lower than the interest rate.
Title Insurance & Title Companies. Title Insurance essentially guarantees the lender (and buyer) that the title is clean and free of any liens, although the borrower is the one that has to pay it. If re-finance a home, you will need to purchase title insurance each time. Some title companies may offer a discount if you have financed the home being re-financed with them in the recent past. This is because they have already done most of the leg work on the title search for the previous mortgage. It may not be a bad idea to ask about this if you are going to re-fi. Final loan documentation papers are usually signed at the title company. Finding a good title company that is on top of things, can make things go smoothly, while a unorganized title company can add un-needed stress to the process.
What are rates based on? The over-simplified answer is bonds. Typically if the stock market is doing well, the bond market goes negative, and visa-versa. For example, if the stock market is rallying, investors take their money out of their safer bonds, and stick them in the stock market. There is now less money in the bond market, so interest rates rise to equalize the supply and demand.
Down Payment How Much/PMI? Ideally lenders would like to see a minimum of 20% down. That way if you default, they have no problem recouping their money. However they will let you put less the 20% down, and then charge you to insure their additional risk. This is referred to as Private Mortgage Insurance (PMI). See this thread for more details: PMI Thread PMI is worthless, and should be avoided at all costs. The simplest way around PMI (if required), is to break your mortgage up into two loans. A primary loan for 80%, and a second loan for the remaining amount. Lenders also have a PMI’less mortgage, which will allow you to borrow over 80%, without paying PMI, but at a higher rate. In every instance of this that I have seen, it is a joke. The rates are always MUCH higher, and the rate does not go down after you reach 80% LTV.
What is a ARM, variable rate mortgages?
What is a Balloon mortgage?
Interest Only Mortgage? (Doesn’t the question answer itself? ) (mention that you can’t put a variable rate second on top of an interest only ARM, at closing time anyway).
What is a lock? (insert something about standard lock term, drawbacks about purchasing longer lock terms.)
What is the difference between a Broker and a Lender? Mortgage brokers can offer more products than one particular bank because brokers can select the best product for specific scenarios. Banks can only offer products that are available to them, which might not necessarily be the best for the customer; however, they sometimes can offer better rates for lower loan amounts and sometimes can process the loan faster.
Often, a broker can get a better loan from a lender, than an individual can. For example, if you walk into a Wells Fargo and apply for a mortgage, the rate will likely be higher than most quotes on bankrate.com, plus higher fees. However, there is a chance that if you go with a broker, and get a rate of say .5% better, the loan will get sold to Wells Fargo anyway.
Misc. Construction Loan?
Early Loan Payoff. Pre-payment penalty.
Investment Property Loans?
Hard Money Loans?
Acronyms and Definitions: Amortization: The rate at which a loan is paid back. LTV = Loan To Value. This is the ratio of the loan, to the value of the home. If you owe $80k on a house worth $100k, your LTV is $80k/$100k = 80%.
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Mortgage FAQ
Credit Score, Inquiries. Credit scores play a significant role in your ability to get a mortgage. The first step when looking for a mortgage should be to check your own credit. You want to know what is on there, and what your score is before you apply for any mortgage. The more you put down, or equity you have in a home, the less a mortgage lender is concerned about credit score. Hard inquiries can bring your credit score down, but don't be afraid to shop around. All mortgage inquiries within a 30 day period should be counted as one inquiry.
Pre-approval When looking to purchase a home, you can get a lender to pre-approve your mortgage. This means that the lender has approved a mortgage for you, for a specified amount. This looks very favorable to the home seller, as your offer will not be contigent upon financing. Thus if a seller is presented with two similar offers, in which one is pre-approved (perhaps with a lower offer amount) and the other isn't pre-approved, the pre-approved buyer would look more appealing to the seller. This is because the seller knows you the pre-approved buyer can get the financing needed, so the offer wouldn't be contingent upon buyer obtaining financing. The point being, getting pre-approved costs nothing (or close to nothing), and it adds value to your offer.
Pre-qualify Pre-qualification should not be confused with pre-approval. Being pre-qualified, adds little if any value to a purchase offer. Being pre-qualified means that somebody ran some rough numbers and you SHOULD be able to qualify for a loan for a specified amount. However, there is no commitment from a lender like there is with a pre-approval.
Good Faith Estimates (GFE). (point out that GFE�s can be manipulated to make it look like they have fewer closing costs. i.e. using only 1 day of pre-paids.)
Points? Origination Fees, Discount Fees.
Buy Down.
What are Closing Costs?
No closing cost loan? The no closing cost loan works by giving you negative buy-down points. So by in exchange for a higher interest rate, money is rebated back to you, in the amount to cover the closing costs. This is a great tool for re-financing. Your rate may be .5% higher, but it cost you nothing to do it. If rates drop further, do it again. Frequent re-financing would be cost prohibitive if you were paying closing costs each time.
No out of pocket cost? This simply means that the lender is taking some of the equity in your home to pay closing costs. For example, if you owe $80k on a mortgage, and you re-fi it, your new loan will be $83k (assuming $3k in closing costs). Less scrupulous brokers or lenders may try to make it sound like the mortgage wont cost you anything, but in reality you are just paying for it with your home equity instead of out of pocket. Not to be confused with the no closing cost loan.
Interest Rate vs. APR The interest rate is simply the percentage of the loan amount that you are charged per year to finance the loan. The Annual Percentage Rate, or APR, starts with the interest rate and then adds in other costs such as points and other fees that, along with interest, are called "finance charges". Generally, APRs are higher than Interest Rates because all finance charges, not just interest, are used to calculate the APR. The APR for ARM's is a little tricky, because it needs to take into acount the adjustments the interest rate will take in the future. To do this, they calculate what the interest rate would adjust to based on todays index rate. This usually results in a downward adjustment. Thus for ARM's, it is not uncommon to see an APR that is lower than the interest rate.
Title Insurance & Title Companies. Title Insurance essentially guarantees the lender (and buyer) that the title is clean and free of any liens, although the borrower is the one that has to pay it. If re-finance a home, you will need to purchase title insurance each time. Some title companies may offer a discount if you have financed the home being re-financed with them in the recent past. This is because they have already done most of the leg work on the title search for the previous mortgage. It may not be a bad idea to ask about this if you are going to re-fi. Final loan documentation papers are usually signed at the title company. Finding a good title company that is on top of things, can make things go smoothly, while a unorganized title company can add un-needed stress to the process.
What are rates based on? The over-simplified answer is bonds. Typically if the stock market is doing well, the bond market goes negative, and visa-versa. For example, if the stock market is rallying, investors take their money out of their safer bonds, and stick them in the stock market. There is now less money in the bond market, so interest rates rise to equalize the supply and demand.
Down Payment How Much/PMI? Ideally lenders would like to see a minimum of 20% down. That way if you default, they have no problem recouping their money. However they will let you put less the 20% down, and then charge you to insure their additional risk. This is referred to as Private Mortgage Insurance (PMI). See this thread for more details: PMI Thread PMI is worthless, and should be avoided at all costs. The simplest way around PMI (if required), is to break your mortgage up into two loans. A primary loan for 80%, and a second loan for the remaining amount. Lenders also have a PMI�less mortgage, which will allow you to borrow over 80%, without paying PMI, but at a higher rate. In every instance of this that I have seen, it is a joke. The rates are always MUCH higher, and the rate does not go down after you reach 80% LTV.
What is a ARM, variable rate mortgages?
What is a Balloon mortgage? Balloon mortgages amortize a loan over one period, but require payoff over a different, shorter period. For example a loan may have a 30 year amortization, but 7-year ballon, which means you make 30-year payments, but have a lump sum due at the end of year 7 for the remaining principal balance.
Interest Only Mortgage? (Doesn�t the question answer itself? ) (mention that you can�t put a variable rate second on top of an interest only ARM, at closing time anyway).
What is a lock? Loan rates change constantly. A rate lock gives the purchaser (borrower) an option to borrow at a specified rate, for a specified period of time. Lenders may charge fees for a lock, with longer rate locks incurring higher fees or associated with higher rates (in a rising rate environment). The most common rate locks are for 30 and 45 days, but lenders offer rate locks for longer terms.
What is the difference between a Broker and a Lender? Mortgage brokers can offer more products than one particular bank because brokers can select the best product for specific scenarios. Banks can only offer products that are available to them, which might not necessarily be the best for the customer; however, they sometimes can offer better rates for lower loan amounts and sometimes can process the loan faster.
Often, a broker can get a better loan from a lender, than an individual can. For example, if you walk into a Wells Fargo and apply for a mortgage, the rate will likely be higher than most quotes on bankrate.com, plus higher fees. However, there is a chance that if you go with a broker, and get a rate of say .5% better, the loan will get sold to Wells Fargo anyway.
Misc. Construction Loan?
Pre-Payment Penalties About a PPP. Very common on "non-prime" mortgages for people with challenged credit histories (example: Citifinancial, Household Finance, Ocwen). For a defined period of time, usually 1 to 5 years, if more than a certain amount of the principal is paid off, the lender will charge a penalty that is tacked on to the remaining balance or payoff amount. The most common penalties are a percentage of the original balance (5 or 6%) or 6 months of interest payments. Some penalties are "soft" in that if you are selling the house, you don't occur a penalty; otherwise, your penalty is a "hard" one. It is not uncommon for penalties to contain a short "hard" period (say, 1 year) followed by a period where the penalty becomes "soft".
How do I know if my loan has a penalty when I am applying? When you complete an application, one of the disclosures is the "Truth in Lending Form". At the bottom, this form will have the following language: PREPAYMENT: If you pay off your loan early, you [ ] may [ ] will not have to pay a penalty. This is usually the only place where a PPP will be mentioned in writing at an application.
How do I know if my loan has a penalty when I am at settlement/escrow? On the day of closing (or previously if you've had a chance to review the forms), check the TIL that the lender is supplying. Additionally, the Note will also have information on a prepayment (if there is one, there is usually a rider explaining it in detail).
Do I have the option of not taking a penalty? You always have that option. However, it usually goes hand in hand with a higher interest rate and/or additional discount points. If your credit is very good and your Loan-to-Value is low, it is unlikely.
Penalties usually last a 1 to 5 year period, although three years or less is the most common.
Investment Property Loans?
Hard Money Loans?
Acronyms and Definitions: Amortization: The rate at which a loan is paid back. LTV = Loan To Value. This is the ratio of the loan, to the value of the home. If you owe $80k on a house worth $100k, your LTV is $80k/$100k = 80%.
Looks like the start of a good basic FAQ. I would really add a part that explains the difference between prequalifying and preapproval. They are completely different. Prequalifying really means nothing. It only lets you know that you can probably get the loan, you are in no way approved and there is no guarantee. They do not even give you a paper saying that you are prequalified normally. Being prequalified means that they put your numbers into their 'desktop originator' calculator and it looks good. Being preapproved means they have collected everything and you DEFINATELY have the mortgage, contingent on you finding your new home.
In a nutshell: prequalification really means nothing except peace of mind for you and an idea of what price range of house you should be shopping for.
I think you are off to a good start but you gotta be very careful with some things you say. PMI is sometimes better in certain cases and unavoidable in some cases. I will go ahead and do some major revisions and hopefully have a pretty good FAQ done this weekend.
bpp, Any insight you could provide would be great. My POV is strictly that of a borrower. I have done 5 mortgages in that past year, and foresee 2 more in the near future. But I am an engineer by profession, so it would be great to have the broker POV as well.
<< Louse, I do have a section in there about that. Do you think that section is unclear? Or did you just not see it? Thanks. MB >>
I would personally explain the difference, and make sure the reader knows that pre-qualification basically means nothing. The way you have them grouped together now makes them look like the same thing when they are VERY VERY different. No one is going to hold a house for you if you are only pre-qualified.
I'm not sure I could write it, but I would like to see a section that gives general guidance for which loans tend to be the best buys for the different groups of buyers. E.g., I suspect too many people the first time around jump automatically to a 30 yr fixed.
Perhaps something like: If you have 7% of the house in cash, and are confident you are changing the loan, or selling the house in less than 5 years, top Recc to look for would be ..., followed by ....
Teaching people to evaluate the cost of their purchase, rather than whether they can make the monthly payment, would be quite an improvemnt
Many of us disagree on points (whether to purchase or not), so I can just imagine what goes on in the general populace. A simple rule-of-thumb to allow people to find the breakeven point in their loan timeline may be helpful. I use points/rate difference, which gives a breakeven point in years. This underestimates by about 10%.
How about a section of "things that make your broker/bank happy, but you poorer"?: Not always avoidable, but worth the effort ! PMI Escrow Expensive Appraisals and Title companies (shop for your own, check out the lawyers in town).
I'm a Realtor in the San Francisco Bay Area (please don't flame... I'm not trying to sell a service!!!), and I agree this is a great FAQ. However, each individual has different needs, and you have to do a needs assessment before you can determine which is the best loan for the you.
This FAQ should help you understand more about the language, but you should consult a professional to find out what loan program really is the best for your scenario! Everything is case by case.
Borrowing money is getting much easier too. There are full-document loans, one-step loans, no-step loans, 100% financing, ARM programs, fully adjustable programs, interest only programs, etc. There's progams for every type of scenario!
Often talking to a Realtor or a loan professional won't cost you a thing anyway! But Buyers Beware! Some loan agents are very pushy and are not as considerate of your needs. Plus, each loan professional might have a different perspective for your scenario, but they should always be subjective and sensitive to your needs. Gather as much information as possible from them before you sign anything!!!
<< Often talking to a Realtor or a loan professional won't cost you a thing anyway! But Buyers Beware! Some loan agents are very pushy and are not as considerate of your needs. Plus, each loan professional might have a different perspective for your scenario, but they should always be subjective and sensitive to your needs. Gather as much information as possible from them before you sign anything!!! >>
Sooner or later you're going to have to talk to a mortgage professional but it's a good idea to educate yourself first... you'll get better service and rates. Make sure you talk to more than one individual as well. Shopping around is your best defense against getting ripped off.
This is such a great topic but sad to see not much info here especially compared to other FAQs. monkeybody must be really busy..., did not respond to eric's good points...I see huge potential for this thread and if we manage well with appropriate info,we could drivelot of repeat threads/questions away pointing to this FAQ but currently this FAQ is not there yet.
Agreed, thanks for the start! I'm researching a new home and being far too young to have any experience with it, I appreciate all the info that can be found on these boards.
Some issues I was thinking over as I recently locked my first mortgage:
* To find the best rate, call around based on rates listed on bankrate.com and interest.com. They should be able to give you a Good Faith Estimate without a credit check (do NOT give them your social security number). Many ppl will call you back -- be firm and tell them if their offer is just not competitive.
* Also check credit unions, some of the best offers come from there (e.g. penfed, and a local one in washington state was the best for me). Another great offer was from my employer -- they invested in an internet bank and thus they cut out all the fees for us.
* Helpful to look at closing costs -- at the same interest rates, places have vastly different costs (even the ones with no points). Look at these carefully. Only the "no closing cost" loans are truly comparable, although sometimes "no closing costs" only means "no lenders fees". And, no matter what, you will have to pay prepaids (although its possible to "go negative".
* Some of the closing costs will be the same with any mortgage, like the title insurance and govt fees. In their Good Faith Estimates, some places give lower numbers here to make their deal sound better. But really, these will be the same no matter where you go, so you need to subtract them out and just look at their "unique" fees.
* Compare internet broker vs local broker vs internet bank vs local bank
* How to compare close offers.... It was easy for me to narrow down to the "best two or three" offers, but hard to differentiate between them. Maybe some calculators based on closing costs, etc, to determine break even points.
* Interest rates change all the time -- In one week, my loan went from 4.5 to 5.125 to 4.625 (where I locked). Look at sites like bankrate.com to guess-timate which way rates are going.
Please do take note. Just because a loan is NO POINT NO FEE might not be the best product to get. Do think ahead!!! Do you think interest rates will continue to drop? If so, the NO POINT NO FEE might be a better product for you. However, if you think interest rates are not going anywhere but up, you might want to pay point/fee to get a lower interest rate and lock it in.
Again, FAQ is good to have to become an informed consumer, but do a NEEDS ANALYSIS for yourself, then talk to a professional to see what product suits you best!
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Mortgage Broker vs. Banks?
Mortgage brokers can offer more products than one particular bank because brokers can select the best product for specific scenarios. Banks can only offer products that are available to them, which might not necessarily be the best for the customer; however, they sometimes can offer better rates for lower loan amounts and sometimes can process the loan faster.
An excellent mortgage loan resource can be found at Jack Guttentag's Mortgage Professor's Web Site. Calculators, spreadsheets, glossary, articles, etc. are in abundance.
Thanks for the input. I started to update the OP, and will add the rest of the points mentioned in a bit. If anyone has something to add, format it like antang did, and I can easily paste it in. Likewise, if there is a post for something mortgage related that you think should go here, PM me to let me know.
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