Frequently Asked Questions
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TERMINOLOGY
Credit History
Ability and willingness to repay financial obligations are major factors in determining a buyer's approval for a mortgage loan. Conventional loans are less lenient and do require a minimum credit score (a computed number attached to person's credit history determined by current and past accounts), but your Mortgage Banker will take the time to discuss any problems that have occurred. FHA and VA loans do not have a credit score requirement and are more flexible for those who do not have much credit history or have had credit problems in the past. Any derogatory payment histories will have to be explained and past due accounts need to be brought current.
Funds to Close
Your Mortgage Banker will have to document an acceptable source of funds for closing. Total funds needed to close consist of three factors; down payment, closing costs and prepaid items. The down payment is simply the difference between your base loan amount and the down payment. Closing costs are charges for services provided for the borrower from different sources. Some of these services include a credit report, appraisal, title company fees and any points that may be paid buy the borrower. The prepaid items include the first year premium for home owners insurance, two months escrow for home owners insurance and taxes and the odd days interest from the date of closing until the last day of the month.
Maximum Loan Amounts and Qualifying Ratios
The three types of Mortgage Loans, FNMA, FHA and VA all have different down payment requirements, and qualifying ratios.
Conventional
Conventional Mortgages usually require at least 5% down payment. There are some different programs that allow a lower down payment. Ask your Mortgage Banker for the specifics about these different programs. The qualifying ratios for Conventional loans are 28% for the housing ratio and 36% for the total liability ratio. Once again, there are exceptions to these guidelines, so ask your Mortgage Banker for more details. To figure your housing ratio, divide the total house payment (principle & interest, taxes, hazard insurance and mortgage insurance, if applicable) by your gross monthly income. For the total liability ratio, divide the sum of your total house payment and total liabilities (auto loans, credit cards, installment loans, etc.) by your gross monthly income.
FHA
FHA Mortgages allow a maximum loan amount of 97.75% of the sale price on purchases over $50,000.00 and 98.75% of the sale price on purchases of $50,000.00 and less. In cases of seller paid closing costs and prepaids, it is possible for a buyer to close with as little as 3% of the sale price. The qualifying ratios are 29% for housing and 41% for total.
VA
VA Mortgages allow financing for 100% of the sale price. This leaves the buyer having to bring in funds to cover only the closing costs and prepaids at closing. VA has only one ratio, which is for total liabilities, at 41%.
As mentioned above, there are exceptions in all three loan programs. Therefore, you should consult your Mortgage Banker with any questions.
What is Mortgage Insurance?
Mortgage insurance (MI) protects a lender from excess risk when a home loan is over 80% of the purchase price. It's temporary -- in most cases, you can cancel it when your equity reaches 20%. With the protection of mortgage insurance, lenders are willing to offer loans with very low down payments -- even with no money down in some cases.
Jump-Start Homeownership
Using mortgage insurance enable you to buy a home and start building equity years sooner than if you waited to save 20%. It gets you in a home before prices rise any further -- and lets that increase in value work for you, rather than against you. Rising values after you purchase can even help you cancel your mortgage insurance sooner!
How Does Mortgage Insurance Work?
Premiums are based on the percentage of your home's value that you borrow. Payments can be covered up up front or paid on a monthly basis. In either case, there is only one check to write, and the cost will not increase over time.
Types of Mortgage Insurance
There are several types of mortgage insurance available. Which product is best depends on your individual situation. Ask your lender how these plans might work for you:
Monthly or Zero Monthly
This payment option uses a coverage term of one month. Premiums are paid monthly as part of your mortgage payment. When you are able to cancel your MI, your mortgage payment will decrease by the amount of the premium.
Single Premium
This payment option consists of a single premium, usually financed into your mortgage. Because the mortgage is amortized over a long period of time, this usually results in a lower monthly payment. If you cancel your MI before the coverage period ends, you may receive a cash refund.
Lender-Paid or "No MI"
Some lenders advertise low down payment loans with "no MI." Usually, these loans do carry MI -- it's simply paid by the lender. The lender covers the mortgage insurance premium through an increase in the interest rate on the loan. These policies usually carry no refund potential, and cannot be cancelled by the borrower.