Frequently Asked Questions

Whether you are a first time homebuyer or seasoned homeowner, this list of frequently asked questions may address some of your major concerns. For definitions of the terms used, please refer to the Mortgage Glossary.

Why do lenders review your credit history?
When a lender is evaluating you for a loan, your credit history is one of the most important factors in determining your credit worthiness. Your credit history will show the debts you owe and your ability to pay them. This helps the lenders determine their risk, meaning how likely you are to repay your debts. The credit report will also show any items on public records including liens, bankruptcies, foreclosures, etc.

To get your credit history, a lender will order a credit report from a credit bureau. The credit bureau will then return your information or score back to the lender. There are three main credit bureaus in the United States. They are:

These bureaus do not approve or deny you for a loan. They simply report your credit information. The bureau may include a credit score with your credit report. For more information on credit scoring go to the credit score topic under borrowing basics.

What are options for buyers who can't afford a 20% down payment?
Assuming you can afford (and qualify for) high monthly mortgage payments and have an excellent credit history, you should be able to find a low or zero percent down payment loan. However, you may have to pay a higher interest rate and loan fees (points) than someone making a larger down payment.

What is private mortgage insurance?
Private mortgage insurance (PMI) policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and the foreclosure sale is less than the amount you owe the lender - that is, the amount of your mortgage loan plus the costs of the foreclosure sale.

Most lenders require PMI on loans where the borrower makes a down payment of less than 20%. Premiums are usually paid monthly and typically cost less than one-half of one percent of the mortgage loan. With the exception of some government and older loans, you can drop PMI once your equity in the house reaches 22% and you've made timely mortgage payments.

Typically PMI will no longer be required once your loan balance falls below 80% of the home value. You can reach this 80% level by:

	Paying enough of your loan over time to reduce the principal balance
	Your home appreciating (increasing in value) enough so your loan balance is less than 80%
	A combination of the two

Be sure that your loan allows PMI to be canceled once you reach the 80% loan to value ratio. Sometimes your PMI will be canceled automatically once you have paid enough, but you should not rely on that to happen. The appreciation of your house is important since the lender will not know what the increased value is. Typically you will need to get a certified appraisal of your house to show the latest market value.

What's the difference between a fixed and adjustable rate mortgage?
With a fixed rate mortgage, the interest rate and the amount you pay each month remain the same over the entire mortgage term, traditionally 15, 20 or 30 years. A number of variations are available, including five- and seven-year fixed rate loans with balloon payments at the end.

With an adjustable rate mortgage (ARM), the interest rate fluctuates according to the interest rates in the economy.

Initial interest rates of ARMs are typically offered at a discounted ("teaser") interest rate lower than for fixed rate mortgages. Over time, when initial discounts are filtered out, ARM rates will fluctuate as general interest rates go up and down. Different ARMs are tied to different financial indices, some of which fluctuate up or down more quickly than others. To avoid constant and drastic changes, ARMs typically limit how much and how often the interest rate and/or payments can change in a year and over the life of the loan. A number of variations are available for adjustable rate mortgages, including hybrids that change from a fixed to an adjustable rate after a set period of years.

Which is better - a fixed or adjustable rate mortgage?
It depends. Because interest rates and mortgage options change often, your choice of a fixed or adjustable rate mortgage should depend on:

	The interest rates and mortgage options available when you're buying a house
	Your view of the future (generally, high inflation will mean ARM rates will go up and lower inflation that they will fall), and
	How willing you are to take a risk. When mortgage rates are low, a fixed rate mortgage is the best bet for most buyers. Over the next five, ten or thirty years, interest rates are more apt to go up than further down. Even if rates could go a little lower in the short run, an ARM's teaser rate will adjust up soon and you won't gain much. In the long run, ARMs are likely to go up, meaning most buyers will be best off to lock in a favorable fixed rate now and not take the risk of much higher rates later. Keep in mind that lenders not only lend money to purchase homes; they also lend money to refinance homes. If you take out a loan now, and several years from now interest rates have dropped, refinancing will probably be an option.

I have had credit problems in the past. Will this affect my ability to obtain a mortgage loan?
In evaluating an application for a mortgage loan an applicant's credit history will be considered as one element in determining the applicant's qualification for the requested loan. Negative credit histories or a lack of previous credit experience can adversely affect an applicant's ability to obtain a requested loan. More recent credit information will be weighed more heavily than older information. Also, some types of credit histories may be given greater weight than others. Generally, the applicant's previous payment history on a mortgage loan is given the greatest weight, followed by major installment accounts such as auto loans, followed then by major credit card accounts such as MasterCardT and VISAT accounts, and finally followed by minor revolving charge accounts such as department stores and finance companies.

How long does the mortgage process take?
The mortgage process can take anywhere from 2 weeks to 6 weeks, but the typical time is 3 weeks. Because of the time it can take, if you are searching for a new home, it is advantageous to pre-qualify to ensure there is plenty of time to get everything in order. If you have any special timeframe, be sure to let your loan specialist know what time constraints you have. Most of the time, your loan specialist can work with you to meet your needs.

When is the right time to refinance?
There is no set answer to this question. A rule of thumb is, if you can reduce your rate by more than 1%, it may be time to refinance. Of course, other situations may make it the right time to refinance. If you can combine a 1st and 2nd mortgage into 1 mortgage, and reduce your monthly payments, or consolidate debt to reduce monthly expenses, it may be advantageous to do so. For a good estimation, go to the Is Now the Time to Refinance? page.

What are points?
"Points" or 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 and you may be able to negotiate for the seller to pay for some of them.

What is an escrow account?
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 taxes or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.

Can I apply for a purchase loan before I've found my property?
Absolutely! When you apply for a purchase pre-approval you simply assume a maximum purchase price, loan amount, and loan program. Once your loan has been approved you can change any of these variables to match the specifics of your purchase transaction. Please note that we cannot lock in a loan until a property address has been specified.

How do I find out if a lender is in good standing?
Mortgage lenders are normally supervised by the Department of Banking in the state in which they do business. You can contact the Department of Banking to inquire about the lender.

What types of problems typically cause closing delays?
This varies from one transaction to another, but the typical closing delays relate to a failure to satisfy loan conditions quickly or a buyer's delay in setting up their homeowner's insurance. The loan condition that most frequently causes problems in the end is a borrower's lack of documentation regarding the source of funds for the down payment and closing costs. Lenders want to see a paper trail of all funds transferred into escrow, and unless a borrower takes the time to document the liquidation, withdrawal and transfer of funds along the way, they must scramble at the end of the transaction to re-create their trail. Lenders frequently fail to inform borrowers about the importance of keeping good records during the loan process. If the property in question is new construction, building and completion delays frequently occur depending upon weather delays, contractor and sub-contractor problems and the builder/developer involved.

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