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New Mortgage FAQ
1. How much house can I afford?
The amount of a loan for which you qualify is based on two different
calculations.
Using what are known as qualification ratios, lenders evaluate your income and
long-term debts to determine a "safe" amount for your mortgage payments. A
fairly standard ratio is 28/36. Certain mortgage plans sometimes use more
liberal ratios-for example, the Fair Housing Authority (FHA) currently uses
29/41.
Here's how it works: With a 28/36 ratio, you are allowed to spend up to 28%
of your gross monthly income for mortgage payments.
The lender will then run a different calculation. This one is your loan payment
and debt payments combined, which may not exceed 36% of your gross
monthly income.
2. Why do I need to check my credit prior to purchasing a house?
Even if you're sure you have excellent credit, it's wise to double-check at the
outset. Straightening out any errors or disputed items now will avoid
troublesome holdups down the road when you're waiting for mortgage
approval.
You may see disputed items, in addition to errors caused by a
faulty Social Security number, a name similar to yours, or a court ordered
judgment you paid off that hasn't been cleared from the public records.
If such items appear, write a letter to the appropriate credit bureau.
Credit bureaus are required to help you straighten things out in a reasonable
time (usually 30 days).
3. How much do I need for a down payment?
Most lenders offer financing programs that allow the borrower to finance up to
100% of the sales price of a new home. However, if no down payment is
made, the borrower will be required to pay for private mortgage insurance
(PMI), see question ten, below, for further information on PMI. If you can
afford to put more money toward a down payment, it will reduce the amount
of your monthly mortgage payments. Some loans programs offer 3% down
payments if you meet certain income standards. The Veterans Administration
(VA) and the Rural Housing Service (RHS) also offer no-down-payment loans.
The lender will want to know how much money you plan to put down and the
source of those funds. Sources you may draw upon include savings, stock
s and bonds, pension funds, real estate holdings, life insurance policies,
mutual funds, and employee savings plans.
You may also use a gift of money from a family member that need not be
repaid. If you do this, you will need to present a letter to your lender that
states the amount of the gift, is signed by the giver, and is notarized by a
third party. A gift letter "form" may be obtained from your lender.
You are also now allowed to withdraw up to $10,000 from both traditional
and Roth Individual Retirement Accounts (IRAs) with no early withdrawal
penalty, if used towards buying your first home.
Under some mortgage programs, such as Fannie Mae's Community Home
Buyer's ProgramSM with the 3/2 Option, part of your down payment may
come from a grant from a nonprofit housing provider in your community.
4. How is pre-qualification different from pre-approval?
Any reputable Mortgage Banker will "pre-qualify" you for a mortgage before
you start house hunting. This process includes analyzing your income, assets
, and present debt to estimate what you may be able to afford on a house
purchase. Real estate brokers can also calculate the same sort of informal
estimate for you.
Obtaining mortgage "pre-approval" is another thing entirely. It means that
you have in hand a lender's written commitment to put together a loan for
you (subject to verification of income and employment).
Pre-approval makes you a strong buyer, welcomed by sellers. With
most other purchases, sellers must tie the house up on a contract while
waiting to see if the would-be buyer can really obtain financing.
5. What is the difference between conforming and large nonconforming loans?
The term "conforming," as opposed to "nonconforming," is sometimes used to
explain loans that offer terms and conditions that follow the guidelines set forth
by Fannie Mae and Freddie Mac. These are the two private, congressionally
chartered companies that buy mortgage loans from lenders, thereby ensuring
that mortgage funds are available at all times in all locations around the
country.
The most important difference between a loan that conforms to Fannie Mae/
Freddie Mac guidelines and one that doesn't fit its loan limit. Fannie Mae and
Freddie Mac will purchase loans only up to a certain loan limit
(currently it is $417,000).
6. Should I choose fixed or adjustable interest rate mortgage?
Interest rates are usually expressed as an annual percentage of the amount
borrowed. You can choose a mortgage with an interest rate that is fixed for the
entire term of the loan or one that changes throughout. A fixed-rate loan gives
you the security of knowing that your interest rate will never change during the
term of the loan. An adjustable-rate mortgage (called an ARM) has an interest
rate that will vary during the life of the loan, with the possibility of both
increases
and decreases to the interest rate and consequently to your
mortgage
payments.
7. What are points?
In the special vocabulary of mortgage lending, "points" are a type of fee that
lenders charge (the full term to describe this fee is "discount points"). Simply
put, a point is a unit of measure that means 1% of the loan payment. So, if
you take out a $100,000 loan, one point equals $1,000.
Discount points represent additional money you can pay at closing to the
lender to get a lower interest rate on your loan. Usually, for each point on
a 30-year loan, your interest rate is reduced by about 1/8th (or .125) of a
percentage point.
8. What is APR (Annual Percentage Rate)?
Annual Percentage Rate (APR) factors interest plus certain closing costs, any
points and other finance charges over the term of a loan. The APR must be
disclosed to you according to federal Truth-in-Lending laws within three
business days of when you apply for a loan, or prior to or at closing for
a refinance.
9. What are closing costs?
On the day you actually buy your new home, in addition to your down payment,
the prepaid property tax and homeowners insurance premiums, you'll need
cash
for various fees associated with the purchase. These expenses are
known as
closing costs and are paid by both buyers and sellers.
Some closing costs you pay up-front when you apply for a mortgage loan.
Those include money for a credit check on all applicants and an appraisal
on the property. Keep in mind that even if you don't eventually receive the
loan, that money is not refundable.
Other closing costs are possible and should be considered when evaluating
your financial situation. These may include, but are not limited to:
Title insurance fee
Survey charge
Loan origination fee
Attorney fees or escrow fees
Document preparation fee
Points-up-front, (interest paid in return for a lower interest rate). Each point
is one percent of the loan amount. Sometimes you can contract for the
seller to pay your points.
10. What is PMI (Private Mortgage Insurance)?
If you put less than 20% down on most loans, you'll be asked to protect the
lender by carrying private mortgage insurance (PMI). Carrying PMI ensures
that the debt is repaid if you default on the loan. This charge adds
approximately an extra half a percent onto the loan.
FHA mortgages, in return for their low-down-payment requirements,
also charge for mortgage insurance premiums (MIP).
Existing Mortgage FAQ
11. What is an escrow account?
The account in which Capital One holds the borrower's escrow amount
to pay property expenses, such as property taxes or homeowner's insurance.
12. What if I want to waive escrows?
When you originated your loan, the terms were based upon the establishment
of an escrow account for taxes and insurance. Under normal circumstances,
this requirement is not waived.
13. Why am I short in my escrow account?
Shortages in your escrow account generally occur due to an increase in
your taxes, insurance or both.
14. Why wasn't my escrow account analyzed my escrow account as
soon as it became short?
Your escrow account is periodically examined to determine if current
monthly deposits will provide sufficient funds to pay taxes, insurance,
and other bills when due.
15. Can I pay my escrow shortage due to an increase in tax and
insurance bills?
Yes. Your payment will then decrease by the shortage determined by
your escrow analysis.
16. How large can my homeowner's insurance deductible be?
The insurance deductible can be the lesser of $1000.00 or 1% of
the coverage amount.
17. I have received a non-renewal notice from my insurance company,
what does this mean?
Your agent is responsible for placing your coverage through another
company without a lapse in coverage and can provide you details
regarding the change.
18. How much homeowner's insurance coverage do I need to obtain?
100% replacement cost of the insurable value determined by the
property insurer.
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