Mortgage FAQ

How much house can I afford?
The amount of a loan for which you qualify is based on 2 different calculations. Using what are known as qualification ratios or debt-to-income, lenders evaluate your income and long-term debts to determine a “safe” amount for your mortgage payments. Our general standard is 45/50. Certain mortgage plans will use more liberal ratios-for example, the Fair Housing Authority (FHA) can extend in excess of these ratios.
Here’s how it works: With a 45/50 Ratio, you are allowed to spend up to 45% of your gross monthly income for mortgage payments. For example, if your household makes $60,000 or $5,000 per month, the simple math computation is $6,000 x 0.45 = $2,700 is the maximum allowed 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 50% of your gross monthly income.
To calculate exactly how much you may borrow, you also need an estimate of interest rates. For example, suppose you had $1,150.00 a month for a mortgage payment; at 5.50% interest rate that would let you borrow about $200,000 on a 30-year loan. At 4.50% the loan amount would increase by to nearly $225,000.
As part of this calculation, you also need to estimate and include the property taxes, homeowner’s insurance, homeowner’s association fees (if applicable) and flood insurance (if applicable) you might need to pay, which are considered part of your monthly housing expense.
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Why is it a good idea to review my credit report prior to purchasing a home?
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 your final mortgage approval.
You may see disputed items, in addition to errors caused by a faulty Social Security Number, a name similar to your own, 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 amount of time (usually 30-45 days).
You can generally get 1 free credit report per year from the following website:
https://www.annualcreditreport.com
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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 payments are made, the borrower may have to pay private mortgage insurance (PMI) or lender paid mortgage insurance (LMPI), see question 10, below, for further information on PMI and LPMI. If you can afford to put more money toward a down payment, it will reduce the amount of your monthly mortgage payments. Some loan programs offer 3.50% down payments if you meet certain income standards. The Veterans Administration (VA) and the Rural Housing Service (USDA or 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 depend greatly on the loan program you choose, but generally include savings, checking, stocks and bonds, cash value life insurance policies, mutual funds, IRA’s, etc.
You may also use a gift of money from an immediate 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 3rd party. A gift letter “form” may be obtained from your lender.
You are also 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 1st 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 non-profit housing provider in a your community.
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How is a pre-qualification different from a pre-approval?
Any reputable Mortgage Banker will “prequalify” you for a mortgage before you start house hunting. This process includes analyzing your income, assets, and present debt-to-income analysis based on what you may be able to afford on a new home purchase. Real Estate brokers can also calculate the same sort of information estimate for you.
Obtaining a 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, employment, etc)
Pre-approval makes you a strong buyer, welcomed by sellers. With most other purchases, a seller must tie the house up on a contract while waiting to see if the would-be buyer can really obtain financing which could cause other potential issues.
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What is the difference between conforming/conventional loans, non-conforming loans, FHA & VA loans?
The term “conforming” as opposed to “non-conforming” 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 2 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 or Freddie Mac guidelines and one that does not fit is generally based on the loan limit. Fannie Mae and Freddie Mac will purchase loans only up to a certain loan limit (currently it is $417,000) and higher in certain “higher cost” areas. Check this website to find the loan limits for your specific area:
https://www.efanniemae.com/sf/refmaterials/loanlimits/index.jsp
If your loan amount will be for more than the conforming loan limit, the interest rate on your mortgage may be higher or you may have slightly different underwriting requirements, particularly in regards to your required down payment amount. Check with your lender about this if you are taking out a larger loan amount.
TIP: Non-conforming loans are sometimes referred to as “Jumbo Loans”
FHA loans are insured by the Federal Housing Administration and were originally designed for low to moderate income borrowers. FHA currently requires 1.00% of the loan amount to be financed and payable to the Department of Housing and Urban Development in addition to monthly mortgage insurance premiums ranging from 0.25% - 1.15%. However, FHA allows, in some cases, for a lower down payment and more flexible lending terms than conforming/conventional loans.
VA loans are insured by the United State Veterans Administration under the Servicemen’s Readjustment Act of 1944 and later. VA loans do not have a monthly insurance premium amount, however there is generally a financed “VA Funding Fee” ranging from 0.00 – 3.30% of the loan amount. VA allows for 100% financing of a new home or a program referred to as a VA IRRL, which stands for Interest Rate Reduction Refinancing Loans. The VA IRRL program is generally only available to active duty or honorably discharged military with a current VA loan.
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Should I choose a "Fixed Rate" or "Adjustable Interest Rate" mortgage?
Interest rates are usually express as an Annual Percentage of the amount borrowered. 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 Interest Rate” mortgage or 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.
Note – After the mortgage fallout of 2008, most “Adjustable Interest Rate” mortgages now offer programs with no prepayment penalties and lower margins in the past. The 3 key components to an ARM is what is known as the Index, Margin & Prepayment Penalty (if applicable).
There are multiple ARM indices for a lender to choose from. The most frequently used in today’s lending world are the 1-year LIBOR, Prime Rate Index and the 1-Year Treasury Constant Maturity Rate (CMT). Each index offers benefits in terms of stability and flexibility.
The Margin is the fixed portion of an ARM loan. In today’s marketplace you will commonly find Margins as low as 2.00 – 2.50%. This is a dramatic change from the mortgage meltdown year of 2008 in which some ARM products had Margins as high as 7.00 – 8.00%.
Another major change after the mortgage meltdown was on prepayment penalties. Most lenders can only charge a prepayment penalty up to 2 years and most have forgone charging prepayment penalties altogether.
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What are points?
In the special vocabulary of mortgage lending, “points” or “discount” are a type of fee that lenders charge (the full term to describe this fee is “discount points”). Simply put, a “point” or “discount” is a unit of measure that means 1.00% of the loan amount. So, if you take out a $150,000 loan, one point equals $1,500.00. Points can also be in multiple increments, such as 1.27% or less than a full point such as 0.27%, for example.
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 1/4th (0.125 – 0.250) of a percentage point.
Also, consult your tax advisor but oftentimes discount points are eligible for certain tax advantages. For reference you can view some information on the IRS website as follows:
http://www.irs.gov/pub/irs-pdf/p936.pdf
Tip: Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points.
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What are closing costs?
On the day you actually buy your new home or refinance your current loan, in addition to any down payment, prepaid property taxes and homeowners insurance premiums, you will also need cash for various fees associated with the purchase or refinance. These expenses are known as closing costs and are paid by both buyers and sellers for a purchase of a home.
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, this money is non-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
Survey
Loan Origination
Discount points
Attorney Fees
Escrow Fees
Notary Fees
Documentation Preparation
Courier
Flood Certification
Underwriting
Processing
Wire Transfer
Appraisal Review Fees
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What is PMI (Private Mortgage Insurance)?
If you put less than 20% down, you may 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 0.50 – 1.00% onto the loan.
FHA mortgages, in return for their low-down payment requirements, also charge for mortgage insurance premiums (UFMIP or MIP) and generally range from 0.25% - 1.150% of the loan amount.
A popular alternative to Private Mortgage Insurance (PMI) is “Lender Paid Mortgage Insurance” or also known as LPMI. The general premises of which the costs are mentioned above with PMI are simply included in the interest rate. Generally, this results in a lower payment and the potential for a larger tax deduction.
If you have additional questions on LPMI or BPMI please call us toll free at 1-877-774-9269.
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What is APR (Annual Percentage Rate)?
Annual Percentage Rate (APR) factors interest or finance charges plus certain closing costs over the term of the loan. The APR must be disclosed to you according to the Federal Truth-In-Lending laws within 3 business days of why you apply for a new mortgage loan, or prior to or at closing for a refinance.
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What is an Escrow Account?
The account in which the mortgage servicer holds the borrower’s escrow amount to pay property expenses such as property taxes, homeowners insurance and flood insurance (if applicable).
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Is an Escrow Account required?
Most lenders prefer to setup an Escrow account, and generally there is an increase to the interest rate if you do not setup an Escrow account with the lender. If the new loan is a FHA, VA or above 80% of your home value you will be required to setup an Escrow account with the lender.
Should you believe extenuating circumstances exist, please inform your mortgage professional at the time of application.
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How should the mortgage clause read on my homeowner's insurance policy?
Bank of England Mortgage
ISAOA / ATIMA
5 Statehouse Plaza
Suite 500
Little Rock, AR 72201
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How large can my homeowner's insurance deductible be?
The insurance deductible can be the lesser of $2,000.00 or 1.00% of the coverage amount.
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How much homeowner's insurance coverage do I need to obtain?
100% replacement cost of the principal balance of the new mortgage.
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What is a late charge?
An additional charge that a borrower is required to pay as a penalty for a failure to pay a regular installment payment when it was due. For example, if your loan is due on the 1st of each month, you have until the 16th to have a payment in the lender’s office without a late charge being added to your account.
Most lenders will allow a 15-day “Grace” period after the regular installment due date before a late charge is assessed. Late charges range from 3.00 – 5.00% of the principal and interest amount due for that installment depending on the loan product.
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Can I setup automatic payment withdrawal or bi-weekly payments?
Most lenders will allow both of these after the first or second payment is made by the scheduled due date. Consult with your mortgage servicer to ensure these options are available to you.
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What is an Interest-Only Mortgage?
These are loans structured to allow the borrower to pay only interest on the principal amount borrowered in monthly installments for a fixed period of time.
A typical example will be a loan for a term of 30 years, in which 10 years the borrower is allowed to only make the interest portion of the payment. Generally, Interest-Only loans are only provided for ARM products.
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How do you calculate LTV or Loan-to-Value ratios?
The loan-to-value (LTV) ratio of your home is calculated by dividing the fair market value of your home by the amount of your home loan.
Example – Home Value of $250,000 and new loan amount of $200,000; the overall LTV would be 80.00%.
CLTV or Combined loan-to value refers to the measure of credit risk in the 2nd lien position.
HCLTV or High Limit Combined loan-to-value refers to the measure of credit risk in the 2nd lien position for a Home Equity Line of Credit when the credit limit exceeds the current balance.
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What is a Home Equity Line of Credit or HELOC?
A Home Equity Line of Credit or HELOC is a form of revolving credit in which your home serves as collateral. With a home equity line, you will be approved for a specific amount of credit and have the ability to use up to your determined credit line or perhaps nothing at all.
A good reference point in understanding Home Equity Lines of Credit can be found on the Federal Reserve website:
http://www.federalreserve.gov/pubs/equity/equity_english.htm
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What does a member of the FDIC mean?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States (U.S.) Federal Government that preserves public confidence in the Banking System by insuring deposits. The FDIC is headquartered in Washington, DC, with several regional offices and numerous field offices throughout the U.S. The FDIC was created during the Great Depression of the 1930’s in response to widespread bank failures and massive losses to bank customers.
In the event of the failure of a specific financial institution, the FDIC may do any of several things. Usually, customer deposits and loans of the failed institution are sold to another institution. Depositors automatically become customers of the new institution and usually notice no significant change in their accounts other than the name of the institution that holds the deposits.
Bank of England has been a proud member of the FDIC since 1-1-1934 and was established on 8-8-1898.
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What is Bankrate.com Safe and Sound Ratings?
Bankrate.com’s Safe & Sound Ratings provide a star rating system to evaluate the current financial status of financial institutions. The information gathered about banks, credit unions, and thrifts is updated as set forth in the “Terms of Use of Safe & Sound Ratings and Reports”:
http://www.bankrate.com/rates/safe-sound/terms-use.aspx
Bank of England is a proud recipient of the highest designation given by Bankrate.com’s Safe and Sound Ratings system of a 5-star rating.
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What is the Truth-in-Lending Act or TILA?
The Truth-in-Lending Act (TILA) is a Federal Law that was enacted on 6-29-1968 designed to promote the informed use of consumer credit by requiring certain disclosures about terms and costs to standardize the manner in which costs associated with borrowing are calculated and disclosed. Most of the specific requirements imposed by TILA are found in Regulation Z.
A more thorough explanation can be found on the FDIC website:
http://www.fdic.gov/regulations/laws/rules/6500-1400.html
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What is the difference between a mortgage banker and a mortgage broker?
A mortgage broker acts as an intermediary guiding a prospective mortgage loan through the process on behalf of an individual or business. A mortgage broker generally does not have any direct control over the decisions or specifically the funding of a loan.
A mortgage banker actually finances and distributes the loan along with the same responsibilities of a mortgage broker mentioned above.
At the peak of the mortgage industry some accounts recognized mortgage brokers as being involved in nearly 2/3rds of all mortgage transactions. In today’s marketplace, most studies show those numbers have dropped to less than 10% of all loans involve a mortgage broker.
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What is a Reverse Mortgage?
A type of mortgage in which a homeowner can borrower money against the value of his or her home. No repayment of the mortgage is required until the borrower dies or the home is sold.
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Why is my APR higher than my Interest Rate or Note Rate?
When you get a mortgage, you are charged 2 different rates – the Annual Percentage Rate (APR) and the Interest Rate or NOTE Rate. Understanding the difference between the 2 rates is important and will help you make an informed decision.
Interest Rate – This is the yearly rate a lender charges for permitting the borrower to use money for a specific length of time. The rate is simply calculated by dividing the total amount of interest charged by the loan amount. For example, if a lender charges a customer $60 a year on a loan of $1,000, then the interest rate would be (60/1000) x 100% or 6.00%.
Annual Percentage Rate – or APR is the annual interest rate you pay on your loan and is the rate used to calculate your monthly payments. The amount of interest you pay is only one of the costs associated with your loan; there may be others.
Your APR includes both your interest and any additional costs or prepaid finance charges; for fixed rate mortgages the APR is almost always slightly higher than your interest rate. However, on ARM loans the APR can actually be lower depending on the current index and margin set by the lender.
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What is a home Appraisal?
A real estate appraisal is the practice of developing an opinion of value of real property, usually its Market Value. Generally, the appraiser will compare at least 3 recent sales in your area to determine your home’s value. In today’s market, many appraisers are also providing at least 2 active sales within a homeowner’s area as well to determine the overall value of the subject property.
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How much does an Appraisal cost?
Appraisals can range from less than $100 to into the thousands depending the complexity of the property being appraised. For most conventional, FHA or VA loans the price of an appraisal will be between $350.00 - $700.00.
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