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Mortgage FAQ

Q: What is a rate lock?

A: A rate lock is a contractual agreement between the lender and borrower. The lender locks the rate for a specific number of days so that you can count on that being the interest rate on your settlement paperwork, assuming that settlement happens within the rate lock timeframe. As the borrower, you agree that you intend to move forward with the transaction.

There are seven components that determine the mortgage interest rate available at the time of a rate lock: FICO®, occupancy, property type, loan program, interest rate, points (if any), and the length of the lock. Your Loan Officer can help you to further understand how each of these components impacts your rate.

Q: What’s the difference between a mortgage broker and a mortgage bank?

A: Generally speaking, a mortgage broker acts as a middleman between lender banks and borrowers. By contrast, a Mortgage Banking company actually makes the lending decision and closes the loan in its name. As a mortgage bank, our team invests time, talent, and energy to guide you through each step of the home financing process. We will take into consideration your overall financial plan and your long-term financial strategy when determining the best home financing solution for you today and tomorrow.

Q: What is a fully documented loan?

A: A fully documented loan is when both income and assets are disclosed and verified, and income is used in determining the applicant’s ability to repay the mortgage. Formal verification requires the borrower’s employer to verify employment and the borrower’s bank to verify deposits. Alternative documentation loans, by contrast, are designed to save time by accepting copies of the borrower’s original bank statements, W-2s, and paycheck stubs. You can find our Purchase Checklist here.

Q: Explain the debt vs. income ratio

A: Your Housing Ratio is your total monthly housing payment as a percentage of your gross monthly income. Your total housing payment consists of principal, interest, property taxes, hazard insurance, mortgage insurance (if applicable), and any condo, co-op, or HOA fees.

Housing ratio = housing payment (PITI) divided by gross monthly income.

Your Total Debt Ratio is your total monthly housing payment plus recurring monthly debts as a percentage of your gross monthly income. Other debts include all other payments such as cars, credit cards, student loans, personal loans, retirement savings loans, etc. The approximate range for your debt ratio is from 33% to possibly as high as 50%. Call for details.

Total debt ratio = housing payment (PITI) + recurring monthly debt divided by gross monthly income.

Q: What is a loan estimate, or L.E.?

A: A loan estimate (LE) is a form that the lender is obliged to provide the borrower within three business days of receiving a completed loan application. The LE is a three page form listing important information, including the estimated interest rate, monthly payment, and total closing costs for the loan.

Q: What does loan-to-value or LTV mean?

A: The term “loan-to-value” refers to a ratio. It means that the mortgage loan being discussed is x percent of the total value of the property. If you’re looking at getting a mortgage that will require you to put 3 percent into the transaction as a down payment, that would be looked at as having 97 percent LTV, or loan-to-value. The amount owed would be 97 percent of the property value.

Q: What is a conforming loan?

A: A conforming loan is a loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac. The loan limits are currently $548,250 for a single family house, except in certain “high cost areas” specified by the agencies, which are assigned individual, higher limits.

Q: What is a JUMBO mortgage?

A: A JUMBO mortgage is a mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, typically $548,250 (the “conforming loan” limit — see the previous question regarding exceptions to this limit).

Q: What are points?

A: Discount points lower the interest rate on a mortgage loan. You can pay discount points upfront to achieve a lower interest rate, which can help toward lower monthly payments. The more discount points you pay, the lower the interest rate will be. An Origination Fee is charged by the lender to cover the costs of making the loan. Both are expressed as a percent of the loan amount; e.g., “1 point” means a charge equal to 1% of the loan balance.

Q: What is a pre-qualification?

A: Pre-qualification is the process of determining whether a customer has enough cash and sufficient income to be eligible for a certain size mortgage loan. Getting pre-qualified can help you decide how much home you can afford before you find your new place. A pre-qualification is subject to verification of the information provided by the applicant. Whether you are already pre-qualified or are just getting started, let us guide you home.

Q: What is PMI?

A: PMI stands for Private Mortgage Insurance. PMI is an insurance policy typically required when the down payment made by a prospective homeowner is less than 20% of the purchase price or appraised value for refinances. PMI rates (and amounts) can vary depending on a number of factors, including your credit score, the amount of your loan, and whether the interest rate on the mortgage is fixed or variable.

Q: Can you finance a second home or investment property?

A: Yes, absolutely. Residential Mortgage Services is your local source for all your home financing needs. From helping to prepare your initial paperwork to ultimately closing on the purchase of the vacation home that you’ve always dreamed of, you can trust that the home finance specialists have you covered.

Q: Should I get a fixed rate or an adjustable rate loan?

A: There are several key considerations that factor into the decision of whether to use a fixed or adjustable rate mortgage to finance your home. These considerations include how long you plan to stay in the house, the general interest rate outlook, your budget, and your tolerance for risk.

Adjustable-rate mortgages are initially lower than fixed-rate loans. They can be a good deal if you know you’re going to stay in your home for a relatively short period of time. Using an adjustable rate mortgage does expose you to the risk that interest rates could rise and drive up your monthly payments.

Fixed-rate mortgages have higher initial interest rates but provide the peace of mind of knowing exactly what your rate will be for the entire term of your loan. With a fixed-rate mortgage, there is no risk of your rate rising, even if general market interest rates do rise.

We will be happy to help you evaluate the pros and cons of fixed and variable rate mortgage options that take your unique needs and interests into account.

Q: Can I still buy a home even if my credit is less-than-perfect?

A: The mortgage application process is designed to ensure that the loan makes sense from the perspective of both the borrower and lender. Reviewing a potential borrower’s credit history is an important part of that process. There are industry and lender level guidelines relative to a borrower’s credit ratings and history. When a potential borrower’s credit rating isn’t where it needs to be, that borrower needs to develop a plan to improve their credit rating and history, ultimately getting it back to the point where they will qualify for a residential mortgage. We will be happy to work with you to review your current credit rating and history and may be able to suggest some steps you can take to improve your standing.

Q: What is the minimum down payment for a home mortgage?

A: There are many loan products and financing options available for you to consider in financing your home. Depending on a borrower’s unique personal circumstances, the minimum can be as low as no-money-down. The higher the percentage of the total purchase price you pay as a down-payment at the time of closing, the lower your monthly mortgage payments typically will be. Private Mortgage Insurance (PMI) is required for most loans with a down-payment of less than 20% of the purchase price.


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