Question 1

Application Checklist

Accepted Answer

Below is a list of documents that are required when you apply for a mortgage. However, every situation is unique and you may be required to provide additional documentation. So, if you are asked for more information, be cooperative and provide the information requested as soon as possible. It will help speed up the application process.
 
Your Property:
 • Copy of signed sales contract including all riders.
 • Verification of the deposit you placed on the home.
 • Names, addresses and telephone numbers of all realtors, builders, insurance agents and attorneys involved.
 • Copy of Listing Sheet and legal description if available (if the property is a condominium please provide condominium declaration, by-laws and most recent budget).
Your Income:
 • Copies of your pay-stubs for the most recent 30-day period and year-to-date.
 • Copies of your W-2 forms for the past two years.
 • Names and addresses of all employers for the last two years.
 • Letter explaining any gaps in employment in the past 2 years.
 • Work visa or green card (copy front & back).

If self-employed or receive commission or bonus, interest/dividends, or rental income:
 • Provide full tax returns for the last two years PLUS year-to-date Profit and Loss statement (please provide complete tax return including attached schedules and statements. If you have filed an extension, please supply a copy of the extension.)
 • K-1's for all partnerships and S-Corporations for the last two years (please double-check your return. Most K-1's are not attached to the 1040.)
 • Completed and signed Federal Partnership (1065) and/or Corporate Income Tax Returns (1120) including all schedules, statements and addenda for the last two years. (Required only if your ownership position is 25% or greater.)
If you will use Alimony or Child Support to qualify:
 • Provide divorce decree/court order stating amount, as well as, proof of receipt of funds for last year.
If you receive Social Security income, Disability or VA benefits:
 • Provide award letter from agency or organization
Source of Funds and Down Payment:
 • Sale of your existing home - provide a copy of the signed sales contract on your current residence and statement or listing agreement if unsold (at closing, you must also provide a settlement/Closing Statement).
 • Savings, checking or money market funds - provide copies of bank statements for the last 3 months.
 • Stocks and bonds - provide copies of your statement from your broker or copies of -certificates.
 • Gifts - If part of your cash to close, provide Gift Affidavit and proof of receipt of funds.
 • Based on information appearing on your application and/or your credit report, you may be required to submit additional documentation.
Debt or Obligations:
 • Prepare a list of all names, addresses, account numbers, balances, and monthly payments for all current debts with copies of the last three monthly statements.
 • Include all names, addresses, account numbers, balances, and monthly payments for mortgage holders and/or landlords for the last two years.
 • If you are paying alimony or child support, include marital settlement/court order stating the terms of the obligation.

Question 2

What is an Appraisal?

Accepted Answer

An Appraisal is an estimate of a property's fair market value. It's a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The Appraisal is performed by an "Appraiser" typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.

Question 3

Why get an Appraisal?

Accepted Answer

Obtaining a loan is the most common reason for ordering an Appraisal, however there are other reasons to get one:
 • Contesting high property taxes
 • Establishing the replacement cost for insurance purposes
 • Divorce settlement
 • Estate settlement
 • Negotiating tool in real estate transactions
 • Determining a reasonable price when selling real estate
 • Protecting your rights in an eminent domain case
 • A government agency requirement
 • A lawsuit

Question 4

What are Appraisal Methods?

Accepted Answer

There are 3 common approaches, or Appraisal Methods, used by Appraisers to establish property value. After thorough exercise of all 3, a final value estimate is correlated. When evaluating single-family, owner-occupied properties, the Sales Comparison Approach is heavily weighted by an Appraiser.
1. Cost Approach – A formula is used to obtain the property value: Land value (vacant) added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
2. Sales Comparison Approach – The Appraiser identifies 3 to 4 comparable comps, recently sold properties in the neighborhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property including square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition. 
3. Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods.

Question 5

Who owns the Appraisal?

Accepted Answer

The mortgage company owns the appraisal even though the borrower paid for it. This is because the mortgage company orders the appraisal on the borrower's behalf, and the Appraiser lists that mortgage company on the report. The borrower does have the right to receive a copy; however it's the mortgage company's discretion to give the borrower the original appraisal report.

Question 6

Can Another Mortgage Company be Used After the Completed Appraisal?

Accepted Answer

Yes. In most cases you will not have to pay for another appraisal if you change your mortgage company, and depending on the loan program type, the first lender can transfer it to the new lender. Some appraisal firms may charge a small fee because additional clerical work is required to reflect the new mortgage company; this is called an "Appraisal Retype Fee". The original mortgage company has the right to refuse to transfer the appraisal to another lender. In this case, a new appraisal is needed.

Question 7

Who determines the market value of a property?

Accepted Answer

The property seller sets the price, especially for residential property, not the Appraiser. Sellers usually don't order an appraisal because they want to obtain the highest price for their home and therefore don't want to be bound by the Appraiser's assessment.

The real estate agent receives a percentage of the price as compensation and often represents the seller in the transaction and assists them in setting the sale price. They perform a Comparative Market Analysis (CMA), which real estate agents in most states are allowed to perform without an Appraiser's License or Certification. The CMA is vital to the agent’s preparation for a listing examining recent property sales in the neighborhood to arrive at a listing price. Typically the agent will suggest a price to the seller based on the CMA however the seller may choose to list their property for a higher price.

Question 8

How can I assist my Appraiser?

Accepted Answer

It's to your advantage to help the Appraiser perform the assessment by providing additional information:
 • What is the purpose for the appraisal?
 • Is the property listed for sale, and if so, for what price and with whom?
 • Is there a mortgage? And if so, with whom, when placed, for how much and what type (FHA, VA, etc.), at what interest rate, or other type of financing?
 • Are any personal properties or appliances included in the property?
 • With an income-producing property, what is the income breakdown and expenses for the last year or two? A copy of the lease may be required.
 • Provide a copy of the deed, survey, purchase agreement, or additional property papers.
 • Provide a copy of the current real estate tax bill, statement of special assessments, or balance owed on anything, i.e. sewer, water, etc.

Question 9

What Happens at Closing?

Accepted Answer

Closing is a step in the mortgage process that puts you closer to becoming the owner of your home.

At Closing, you will sign loan documents, closing funds will be collected and the title agent will send specific documents to be recorded to transfer legal ownership of the property to you. Closing a mortgage is a legal process, so procedures and requirements will differ according to state and local laws.

Generally, the closing agent conducts the closing meeting and makes sure that all documents are signed and payments are properly disbursed. Some states require you to be represented by an attorney, others do not. Although, having an attorney present at the closing may not be required by law, you may want one to review the closing documents. The lender, seller, or their representatives and the real estate agents may or may not be at the closing. It is not unusual for participants to complete their part of the transaction without ever meeting.

Once the closing agent and the lender are satisfied that all of the instructions for closing are complied with, the transaction is complete and you are now the owner of the property.

Question 10

What are Statutory Costs?

Accepted Answer

These are expenses you have to pay to state and local agencies, even if you paid cash for the house and didn't need a mortgage:
 
Transfer Taxes – Required by some localities to transfer the title and deed from the seller to the buyer.
 
Deed Recording Fees – To pay for the County Clerk to record the deed and mortgage, and to change the property tax billing.
 
Pro-Rated Taxes – Such as school taxes and municipal taxes may need to be split between the buyer and the seller since they are due at different times of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2-months, and the seller would owe for the other 10-months. Pro-rated taxes are usually paid based on the number of days, not months of ownership. Some lenders may require you to set up an escrow account to cover these bills. If not, you may want to set one up yourself to insure the funds are set aside for these important expenses.
 
State & Local Fees – Other state and local mortgage taxes and fees may apply.

Question 11

What are Third-Party Costs?

Accepted Answer

There may be expenses paid to others like inspectors or insurance firms, even if you paid cash for the property:
Attorney Fees – You may want to hire an attorney when purchasing a home. They usually charge a percentage of the selling price up to 1%, or some work on an hourly basis or for a flat fee.
Title Search Costs – Usually your attorney will perform or will arrange for the title search to ensure there are no obstacles such as liens or lawsuits regarding the property. Or you may work with a title company to verify a clear property title.
Homeowner's Insurance – Most lenders require you prepay the first year's premium for homeowners insurance, sometimes called hazard insurance, and must show proof of payment at the closing. This insures that the investment will be secured even if the property is destroyed.
Real Estate Agent's Sales Commission – The seller pays the real estate agent's commission, and if one agent lists the property and another sells it, the commission is usually split. The commission is negotiable between the seller and the agent.

Question 12

What are Finance and Lender Charges?

Accepted Answer

Most people associate closing costs with finance charges levied by mortgage lenders. The charges you pay will vary among lenders, so it’s good to shop around for the best combination of mortgage terms and closing, or settlement costs:
Origination Fee – For processing the mortgage application there may be a flat fee, or a percentage of the mortgage loan.
Credit Report – Most lenders require a credit report on you and your spouse, or an equity partner. This fee is often a part of the origination fee.
Points – One point is equal to 1% of the amount borrowed. Points can be shared with the seller which is negotiable in the purchase offer. Some lenders will let you finance points which will add to the mortgage cost. Paying points may be tax deductible, consult your tax preparer to determine if applicable.
Lender's Attorney's Fees – For your attorney to draw-up documents and to ensure that the title is clear, and for representation at the closing.
Document Preparation Fees – There are several documents and papers prepared during the home-buying process ranging from the application to the closing. Lenders may charge for this, or the fees may be included in the application and/or attorney’s fees.
Preparation of Amortization Schedule – Some lenders will prepare a detailed amortization for the full term of your mortgage. This is usually done for fixed mortgages or adjustable mortgages.
Land Survey – Lenders may require that a land survey be completed to check the property lines to ensure that any improvements done on the property or by neighboring properties did not cross over the property lines.
Appraisals – Professional Appraisers can do a comparison of the value of the property to that of other recently sold neighborhood properties. Lenders want to be sure the property is worth the value of the mortgage loan.
Lender's Mortgage Insurance – If your down payment is 20% or less, many lenders require that you purchase Private Mortgage Insurance (PMI) for the loan amount. If you should default on your loan, the lender will recover their money. These insurance premiums will continue until your principal payments, plus the down payment equal 20% of the selling price and may continue for the life of the loan. The premiums are usually added to any amount you must escrow for taxes and homeowner's insurance.
Lender's Title Insurance – Even with a title search for any property obstacles, liens or lawsuits, many lenders require insurance to protect their mortgage investment. This is a 1-time insurance premium usually paid at closing, and is for the lender only, not the homebuyer.
Release Fees – If the seller has worked with a contractor who put a lien on the house and is expecting payment from the proceeds of the house sale, there may be fees to release the lien. The seller usually pays these fees which could be negotiated in the purchase offer.
Inspections Required by Lenders – The lender may require a Termite Inspection if you apply for an FHA or a VA mortgage loan. In many rural areas a water test may be required to ensure the well and water system will maintain an adequate water supply to the house; for quantity not quality. Depending on the sales contract and property type, additional inspections may be required.
Prepaid Interest – The first regular mortgage payment is usually due from 6-8 weeks from closings; however, interest costs begin at closing time. The lender will calculate the interest owed for that period of time, and that fraction of interest is sometimes due at closing.
Escrow Account – Lenders often require that you set-up an Escrow Account, where you will make monthly payments to, for taxes, homeowner's insurance, and sometimes PMI (Private Mortgage Insurance). The amount placed in this account at closing depends on when property taxes are due and the timing of the settlement transaction. The lender can give you a cost approximation during the application process of your mortgage loan.

Question 13

Are There Any Other Up-Front Expenses?

Accepted Answer

The major portion of other up-front expenses is the deposit or binder you make at the time of the purchase offer, the remaining cash down payment you make at closing, or can include:
Inspections – Lenders may require inspections, and you can make your purchase offer contingent based on satisfactory completion of some other inspections such as structural, water quality tests, septic, termite, roof and radon tests. You and the seller can negotiate these inspection fees.
Owner's Title Insurance – You may want to purchase title insurance in case of unforeseen problems so you're not left owing a mortgage on property you longer own. A thorough title search ensures a clear title.
Appraisal Fees – You may want to hire an Appraiser either before you sign a purchase offer, or after reviewing the lender's appraisal report.
Money to the Seller – You'll need to pay for items in the house you want that were not negotiated in the purchase offer such as appliances, light fixtures, drapes, lawn furniture, or fuel oil and propane left in tanks.
Moving Expenses – If you are changing jobs, your new employer may pay for your relocation, otherwise you must figure in the moving costs such as truck rentals, professional movers, cash for utility deposits like telephone, cable, electricity, etc.
Escrow Account Funds – In the purchase offer, you can request that the seller set up an Escrow Account to defray any costs for major cleanup, radon mitigation procedures, house painting, appliance repairs, etc. Depending on the purchase offer contract and contingency clauses, you may discover that you have expenses upon moving in.
Example: Your purchase offer contract has a clause making the purchase contingent on a satisfactory structural inspection, and it’s determined that the house needs a new roof. You can negotiate to have the seller arrange for the work to be done but, this will delay the closing date. You may have to agree to a higher price for house, or to pay some of the new roof repair expenses. Or you and the seller may split the cost using estimates from a contractor of your choice, and each of you will put funds into an Escrow Account. Or, the seller may be willing to reduce the sale price of the house, but either way cash will be needed for the new roof.
Time Investment – One often overlooks major up-front costs in buying a home. The time and expenses invested in house-hunting, which can take up to 4-months, plus the time spent searching for the best mortgage for you, the right real estate agent, an attorney, and other related things that take up your valuable time.

Question 14

What is TRID?

Accepted Answer

TILA RESPA Integrated Disclosures (TRID) also knows as the Know Before you Owe rule took effect on October 3, 2015. The rule is designed to help borrowers understand the terms of their home financing transaction including how much cash will be needed at closing to cover prorated taxes, first month's interest, and other settlement costs.
 
Let's break down the disclosures:
 • An Loan Estimate or LE will be issued no later than three business days after receiving the application.
 • A Closing Disclosure or CD must be received by the borrower no lather than three business days before consummation.
 • Revised LEs and CDs will be issued with the rate is locked, or if certain terms and conditions of the loan change.

Question 15

What is a credit report?

Accepted Answer

Your credit payment history is recorded in a file or report. These files or reports are maintained and sold by "consumer reporting agencies" (CRAs). One type of CRA is commonly known as a credit bureau. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge account, a personal loan, insurance, or a job. Your credit record contains information about your income, debts, and credit payment history. It also provides public records information such as bankruptcy or tax lien.

Question 16

Do I have a right to know what's in my report?

Accepted Answer

Yes, if you ask for it. The CRA must tell you everything in your report, including medical information, and in most cases, the sources of the information. The CRA also must give you a list of everyone who has requested your report within the past year-two years for employment related requests.

Question 17

What type of information do credit bureaus collect and sell?

Accepted Answer

Credit bureaus collect and sell four basic types of information:
 
Identification and employment information
Your name, birth date, Social Security number, employer, and spouse's name are routinely noted. The CRA also may provide information about your employment history, home ownership, income, and previous address, if a creditor requests this type of information.
 
Payment history
Your accounts with different creditors are listed, showing how much credit has been extended and whether you've paid on time. Related events, such as referral of an overdue account to a collection agency, may also be noted.
 
Inquiries
CRAs must maintain a record of all creditors who have asked for your credit history within the past year, and a record of those persons or businesses requesting your credit history for employment purposes for the past two years.
 
Public record information
Events that are a matter of public record, such as bankruptcies, foreclosures, or tax liens, may appear in your report.

Question 18

What is credit scoring?

Accepted Answer

Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points -- a credit score -- helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.
 
The most widely use credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. Your score will fall between 350 (high risk) and 850 (low risk).
Because your credit report is an important part of many credit scoring systems, it is very important to make sure it's accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:
 • Equifax: (800) 685-1111 
 • Experian (formerly TRW): (888) EXPERIAN (397-3742) 
 • Trans Union: (800) 916-8800 
 • These agencies may charge you up to $12.00 for your credit report.
You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. This free credit report may not contain your credit score and can be requested through the following website: https://www.annualcreditreport.com

Question 19

Why is credit scoring used?

Accepted Answer

Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.

Question 20

How is a credit scoring model developed?

Accepted Answer

To develop a model, a creditor selects a random sample of its customers, or a sample of similar customers if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness. Then, each of these factors is assigned a weight based on how strong a predictor it is of who would be a good credit risk. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company.
 
Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like -- race, sex, marital status, national origin, or religion -- as factors. However, creditors are allowed to use age in properly designed scoring systems. But any scoring system that includes age must give equal treatment to elderly applicants.

Question 21

How reliable is the credit scoring system?

Accepted Answer

Credit scoring systems enable creditors to evaluate millions of applicants consistently and impartially on many different characteristics. But to be statistically valid, credit scoring systems must be based on a big enough sample. Remember that these systems generally vary from creditor to creditor.
 
Although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately, and more impartially than individuals when it is properly designed. And many creditors design their systems so that in marginal cases, applicants whose scores are not high enough to pass easily or are low enough to fail absolutely are referred to a credit manager who decides whether the company or lender will extend credit. This may allow for discussion and negotiation between the credit manager and the consumer.

Question 22

What can I do to improve my score?

Accepted Answer

Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change -- but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application.
 
Nevertheless, scoring models generally evaluate the following types of information in your credit report:
 
Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.
How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.

Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.
To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.

Question 23

What happens if you are denied credit or don't get the terms you want?

Accepted Answer

If you've been denied credit, or didn't get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application. If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information.

If you are denied credit, the Equal Credit Opportunity Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within 60 days. Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: "Your income was low" or "You haven't been employed long enough." Unacceptable reasons include: "You didn't meet our minimum standards" or "You didn't receive enough points on our credit scoring system."

If a creditor says you were denied credit because you are too near your credit limits on your charge cards or you have too many credit card accounts, you may want to reapply after paying down your balances or closing some accounts. Credit scoring systems consider updated information and change over time.

Sometimes you can be denied credit because of information from a credit report. If so, the Fair Credit Reporting Act requires the creditor to give you the name, address and phone number of the credit reporting agency that supplied the information. You should contact that agency to find out what your report said. This information is free if you request it within 60 days of being turned down for credit. The credit reporting agency can tell you what's in your report, but only the creditor can tell you why your application was denied.

Question 24

Fair Credit Reporting Act

Accepted Answer

The Fair Credit Reporting Act (FCRA) is designed to help ensure that CRAs furnish correct and complete information to businesses to use when evaluating your application.
 
Your rights under the Fair Credit Reporting Act:
 • You have the right to receive a copy of your credit report. The copy of your report must contain all of the information in your file at the time of your request.
 • You have the right to know the name of anyone who received your credit report in the last year for most purposes or in the last two years for employment purposes.
 • Any company that denies your application must supply the name and address of the CRA they contacted, provided the denial was based on information given by the CRA.
 • You have the right to a free copy of your credit report when your application is denied because of information supplied by the CRA. Your request must be made within 60 days of receiving your denial notice.
 • If you contest the completeness or accuracy of information in your report, you should file a dispute with the CRA and with the company that furnished the information to the CRA. Both the CRA and the furnisher of information are legally obligated to reinvestigate your dispute.
 • You have a right to add a summary explanation to your credit report if your dispute is not resolved to your satisfaction.

Question 25

What is Foreclosure?

Accepted Answer

It's when a homeowner is unable to make principal and/or interest payments on their mortgage. The lender, a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract.

Question 26

What Happens When a Mortgage Payment is Missed?

Accepted Answer

Unfortunately, Foreclosure can happen. By missing a mortgage payment, your lender has the legal means to repossess your home and force you to move out. If your property is worth less than the total amount you owe on your loan, a Deficiency Judgment could be pursued. Both a Foreclosure and a Deficiency Judgment can affect your ability to qualify for credit in the future. So you should avoid foreclosure, if possible.

Question 27

How Can a Foreclosure be Avoided?

Accepted Answer

First of all, if you are struggling to make your payments, call or write to your lender's Loss Mitigation Department right away. Explain your situation and be prepared to provide them with financial information like your monthly income and expenses. Just follow these 3 simple rules:
 
1. Contact your lender as soon as you know your payment will be late.
2. Never ignore the lender's letters or phone calls.
3. Don't assume that your situation is hopeless.

Question 28

What is a FHA Loan?

Accepted Answer

In 1934, the Federal Housing Administration (FHA) was established to improve housing standards and to provide an adequate home financing system with mortgage insurance. Now families that may have otherwise been excluded from the housing market could finally buy their dream home.
 
FHA does not make home loans, it insures a loan; should a homebuyer default, the lender is paid from the insurance fund.
 • Buy a house with as little as 3.5% down.
 • Ideal for the first-time homebuyers unable to make larger down payments.
 • The right mortgage solution for those who may not qualify for a conventional loan.
 • Down payment assistance programs can be added to a FHA Loan for additional down payment and/or closing cost savings.

Question 29

FHA Loans vs. Conventional Home Loans

Accepted Answer

The main difference between a FHA Loan and a Conventional Home Loan is that a FHA loan requires a lower down payment, and the credit qualifying criteria for a borrower is not as strict. This allows those without a credit history, or with minor credit problems to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting. Some borrowers, with extenuating circumstances surrounding bankruptcy discharged 3-years ago, can work around past credit problems. However, conventional financing relies heavily upon credit scoring, a rating given by a credit bureau such as Experian, Trans-Union or Equifax. If your score is below the minimum standard, you may not qualify.

Question 30

If I've Had a Bankruptcy in Recent Years, Can I Get a FHA Loan?"

Accepted Answer

Yes, generally a bankruptcy won’t preclude a borrower from obtaining a FHA Loan. Ideally, a borrower should have re-established their credit with a minimum of two credit accounts such as a car loan, or credit card. Then wait two years since the discharge of a Chapter 7 bankruptcy, or have a minimum of one year of repayment for a Chapter 13 (the borrower must seek the permission of the courts). Also, the borrower should not have any credit issues like late payments, collections, or credit charge-offs since the bankruptcy. Special exceptions can be made if a borrower has suffered through extenuating circumstances like surviving a serious medical condition, and had to declare bankruptcy because the high medical bills couldn't be paid.

Question 31

How big of a FHA Loan Can I afford?

Accepted Answer

Your monthly costs should not exceed 29% of your gross monthly income for a FHA Loan. Total housing costs often lumped together are referred to as PITI.
 
P = Principal
I = Interest
T = Taxes
I = Insurance
 
Examples:
 
Monthly Income x .29 = Maximum PITI 
$3,000 x .29 = $870 Maximum PITI
 
Your total monthly costs, or debt to income (DTI) adding PITI and long-term debt like car loans or credit cards, should not exceed 41% of your gross monthly income.
 
Monthly Income x .41 = Maximum Total Monthly Costs 
$3,000 x .41 = $1230 
$1,230 total - $870 PITI = $360 Allowed for Monthly Long Term Debt
 
FHA Loan ratios are more lenient than a typical conventional loan.

Question 32

What is Private Mortgage Insurance (PMI)?

Accepted Answer

On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. Sometimes you may need to pay up to 1-year's worth of PMI premiums at closing which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment, or ask about other loan program options.

Question 33

How Does Private Mortgage Insurance (PMI) Work?

Accepted Answer

PMI companies write insurance policies to protect approximately the top 20% of the mortgage against default. This depends on the lender's and investor's requirements, the loan-to-value ratio, and the type of loan program involved. Should a default occur the lender will sell the property to liquidate the debt, and is reimbursed by the PMI company for any remaining amount up to the policy value.

Question 34

Could Obtaining Private Mortgage Insurance (PMI) Help Me Qualify for a Larger Loan?

Accepted Answer

Yes, it will help you obtain a larger loan, here’s why. Let's say that you are a family with $42,000 Annual Gross Income and monthly revolving debts of $800 for car payment and credit cards, and you have $10,000 for your down payment and closing costs on a 7%-interest mortgage. Without PMI the maximum price you can afford is $44,600, but with PMI covering the lender's risk you now can buy a $62,300 house. PMI has afforded you 39% more house.

Question 35

How Much Does Private Mortgage Insurance (PMI) Cost?

Accepted Answer

PMI costs vary from insurer to insurer, and from plan to plan. Example: A highly leveraged adjustable-rate mortgage requires the borrower to pay a higher premium to get coverage. Buyers with a 5% down payment can expect to pay a premium of approximately 0.78% times the annual loan amount, $92.67 monthly for a $150,000 purchase price. But, the PMI premium would drop to 0.52% times the annual amount, $58.50 monthly if a 10% down payment was made.

Question 36

How Does the Buyer Apply for PMI?

Accepted Answer

Typically the buyer covers the cost of PMI, but the lender is the PMI company's client and shops for insurance on behalf of the borrower. Lenders usually deal with only a few PMI companies because they know the guidelines for those insurers. This can be a problem when one of the lender's prime companies turns down a loan because the borrower doesn’t fit its risk parameters. A lender might follow suit and deny the loan application without consulting a second PMI company which could leave all parties in an undesirable position. The lender has the difficult task of being fair to the borrower while shopping for the most effective way to lessen liability.

Question 37

What is the History of Private Mortgage Insurance (PMI)?

Accepted Answer

The Private Mortgage Insurance industry originated in the 1950's with the first large carrier, Mortgage Guaranty Insurance Corporation (MGIC). They were referred to as "magic" as these early PMI methods were deemed to "magically" assist in getting lender approval on otherwise unacceptable loan packages. Today there are 8 PMI underwriting companies in the United States.

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