1. What is a pre-qualification?
Pre-qualification is the starting point in your search for mortgage financing. A quick snapshot is taken which includes income, existing debt, savings, length of employment, etc. All of these factors will then be analyzed to determine your loan eligibility.
2. What is a pre-approval?
Pre-approval is written documentation that shows you have the support of a lender who is willing to finance you. It means your loan application has been reviewed by a lender. Based on your income, debt-ratio and savings, the lender, provides the dollar amount you are eligible to borrow. Now you can shop around for houses that fit into that loan amount category.
3. What is the difference between pre-qualification and pre-approval?
4. Why should I get pre-approved?
There are several reasons to get pre-approved:
5. What documents are required for a pre-approval?
The following document checklist is much more exhaustive than what would be required at the pre-approval stage. Additional information/documents may be asked for during the loan underwriting when your offer is accepted. Being prepared in advance is always a good idea.
Identity and Income Verification
Credit Verification
Income Verification for Self-Employed Applicants
Income/Tax Documents
Other Documents
Additional documents and letters of explanation may be required depending on your unique situation.
6. How long does it take to get a pre-approval?
At Arcus Lending, it typically takes 1-3 business days to complete the pre-approval process.
7. How long is the pre-approval good for?
A pre-approval letter is usually good for 60-90 days. However, we at Arcus Lending understand it’s not always possible to find a house and get your offer accepted in 3 months. We do not make you go through the entire process again after 90 days. If nothing has changed with your credit qualification, (and overall income, assets, employment have remained similar), we will simply renew your letter and issue you a new one.
8. Will it impact my credit score?
Yes, it can potentially impact your credit score. The amount of impact is dependent on your credit profile, the stronger the credit – the lesser is the impact. Credit reports pulled online (also called Consumer Credit Reports) are usually not accurate for mortgage purposes as they may reflect a higher credit score than what is used for qualifying mortgage loans.
Whether it impacts your score or not, the credit report must be pulled to complete a “true” mortgage pre-approval process.
9. Can the pre-approved amount change in the future?
Yes, the amount can change for various reasons. Any change in your income, assets, or debts can increase or decrease the amount of loan you were pre-approved for. Also, an increase in mortgage rates would mean that you qualify for a lower loan amount now and vice-a-versa.
10. Can I pre-qualify myself?
While it is impossible to know all the guidelines, it’s possible to do a back of the envelope calculation to figure out how much you qualify for.
While there are several other factors that decide your qualification for your loan, one of the most important factors is something you should be able to calculate on your own.
Debt-to-income (DTI) ratio measures a borrower’s gross monthly income compared to their credit payments and other monthly liabilities.
11. What is DTI or Debt to Income ratio?
Debt-to-Income Ratios are designed to give guidance on acceptable levels of debt allowed by loan programs. This is calculated by dividing the total monthly housing payment plus all consumer debt by the gross monthly income. For self-employed, it would be net income derived by deducting all expenses from the gross revenue.
12. What kind of property should you buy?
What is your ideal home? Condo, townhome, or a single-family home? Again, the answer to this question is different for everyone and depends upon personal choice, budget, and life stage.
For example, singles or couples just starting out, maybe tight on budget and prefer to start with a condo or townhome. People who travel a lot may also prefer a condo or townhome since the association takes care of some maintenance. Families with kids might prefer a single-family home to have a backyard for kids to play in.
If a single-family home is not your choice – whether it’s the budget or you are trying to avoid regular maintenance chores, a condominium (called condo in short) or townhome may just be the right thing.
13. What is a Homeowner’s Association?
If you decide to buy a condo, townhome, or even a single-family home in a Planned Urban Development (PUD) you will be part of a homeowner’s association and will need to pay monthly dues. You will pay your share to maintain the buildings and the grounds. In addition to monthly fees, you could also be assessed for expenses that cost more than the association reserve pool has. Some dues may be very high. The other flip side of HOA dues is that they cannot be written of pre-tax, unlike mortgage interest.
Once you have decided whether you want a single-family home, a condo, or a townhome, the next step is to figure out whether you want to buy an old home or a new one.
14. What is a short sale?
When a mortgage is sold short of what is owed, it’s called a short sale. The lender takes a loss on such a transaction. The only reason the lender agrees to a short sale is to avoid a bigger loss that would result from a foreclosure.
15. What to expect in a short sale?
16. How to buy a short sale?
17. What is foreclosure?
Foreclosure happens when a homeowner cannot pay his mortgage and the lender legally forces a sale to recoup some losses. Foreclosures are trickier to buy than short sales. Lenders do not foreclose immediately. The home owner is first given a notice period.
18. What should you keep in mind when considering foreclosure?
Just like short sales, foreclosures are not always a good deal. Here are a few factors to keep in mind when considering a foreclosure:
Get a good agent who has experience in foreclosures so you can navigate the process smoothly. The agent will also help you determine the right market value of the home.
19. How to buy a foreclosure?
There are two ways to buy a foreclosure:
This may occur at the property, at the courthouse, or at a hotel where a lot of properties are being auctioned. If you decide to buy, you may need to buy the property as-is because there may be no time for inspections. Unless you are a contractor or have a lot of experience, buying a property without seeing the physical condition may not be a good idea. The other issue may be liens on the property which will become your debt when you close on the property. A title search is the only way to find out if there are any liens on the property. If you decide to buy at an auction you will need to do the following:
You will face immense competition from cash buyers and investors. If you need financing, this may not be the best route.
When a property does not sell at an auction, the lender takes the title and such a property is called Real Estate Owned by the Lender (REO).
20. How to buy an REO?
REOs can be good deals because the lender is eager to sell the property to avoid the cost of maintaining it. Banks may price REO’s lesser than the comparable properties, so expect a lot of competition from other buyers. Decide on your max offer and stick to it. Take time to study comps sold within the last 90 days and homes listed for sale to determine the market value of the property.
21. What is a For-Sale-By-Owner (FSBO) property?
For sale by owner (FSBO) are properties that are sold directly by the owner without the help of a real estate agent. Per the National Association of Realtors’ latest data, close to 8% of homes sold in the country are FSBOs. It is entirely possible to get some savings when buying an FSBO. Since the seller is not using an agent he may be willing to pass on some savings to you. It could even be that the seller might have underpriced the house.
If the owner is not willing to pay your agent the commission, she would most likely not show you that property. So, if you are interested in one, you may have to look out on your own. FSBOs can be found at:
If you decide to buy an FSBO without an agent, hire a real estate attorney to help you with the contracts and paperwork. And be sure to hire a title and escrow company to help you with closing.
22. What is a fixer-upper?
A fixer-upper is a real-estate slang word for a property that will require maintenance work (redecoration, reconstruction, or redesign).
They are popular with buyers who wish to buy a starter home and are on a budget.
When you are ready to “fix” the house make sure you pick up repairs that will add value to the house. Adding square footage to the property can be profitable. All you need is spare cash and a good contractor. A general rule of thumb to adding square footage is to build your home slightly better than the average home in the neighborhood. Don’t overbuild. Think about the best improvements for the lowest cost and avoid spending more per square footage if possible.
A lot of fixer-uppers may not qualify for financing because of the condition of the property. If you plan to get a mortgage, make sure to check with your loan officer before making an offer.
23. What is the lease to buy option?
If you don’t have the money to buy just yet but don’t want to rent, then lease to buy maybe a good middle-ground for you.
Benefits
24. What to know when buying a flipped property?
Home investors normally buy homes in bad condition at a low price and “fix it” hoping to make a profit on the sale. Most of the time the investors are in a hurry to get the repairs done which may result in compromising the quality of the work.
Homebuyers are interested in fips because they may be a good deal. All you need is to do some research. By visiting the county land office you can get the deed pulled which will give you information like when the house was purchased, who purchased it, and the purchase price. From the deed, you can also get information about the owner’s financial condition since any mechanics or tax liens and foreclosures will show up there. Your real estate agent or a title company should also be able to provide this information.
A flipped home may look shiny on the outside but have issues when inspected by a professional. Here are some tips to keep in mind when buying such a home:
25. What are neighborhood comparables?
A key thing to help you “offer” the right price is studying comparables (called comps in short). Comps are properties sold within 1 mile of the home in the last 6 months and are structurally similar to the house you are planning to buy (like lot size, square footage, number of bedrooms, condition, quality of construction) To get data on comparable sales you can use websites like Zillow and Redfin.
Here’s what you should be researching:
Your real estate agent will be able to provide you with answers to all these questions via a Comparable Market Analysis (CMA). Lean on their data. Despite the public availability of real estate data, agents still get the best quality with the most frequent updates. Put them to work.
26. What is a hot or cold market?
If you are in a hot market, be prepared to close quickly, and pay more than the listing price. In a cold market, you have more negotiating power.
27. How do you know if your market is hot or cold?
Once you start looking, you will get some sense of what direction your local real estate market is headed. Note that the market depends on many factors- interest rates, economy, employment data, housing availability, supply and demand for homes and is nearly impossible to predict.
But these tips should help:
28. What is a loan or financing contingency?
Loan contingency is the period of time the seller is giving you to obtain full, formal loan approval. It is important to include a financing contingency in your offer, as it makes the transaction dependent on you receiving the mortgage you’ve applied for. It specifies your cancellation rights if you are unable to obtain financing.
This contingency is typically between 10 and 21 days depending on what has been negotiated in the contract. The earnest money deposit you make at the time the offer is accepted will be put in jeopardy once the contingency for the loan has expired. In fact, pursuant to the terms of the contract, if the loan contingency has expired and you fail to close the purchase transaction, you could lose your earnest money deposit and
29. What is a contract period?
The contract period is the period of time in which all due diligence must be completed, including obtaining loan approval, property appraisal, home inspection reports, termite inspection, etc. Give yourself enough time for all due diligence to be completed for this very important purchase you are about to make.
Typically, purchase contracts are drawn up for a period of 30, 45, or 60 days. However, it is not uncommon for a purchase contract to be written with terms of more than 60 days if the parties involved need that long of a period to complete all aspects of due diligence. If it’s a new property being built by a builder, this period could last several months.
30. What is a home inspection contingency?
As part of the negotiation in your purchase contract, you and the seller will mutually agree upon the amount of time needed to complete all the home inspection procedures that are required. Utilizing an outside third-party service to complete these inspections is highly recommended.
You will be provided with a report by the home inspection company that you should review very thoroughly to make sure there are no material defects in the property that you were not aware of, and which could subsequently have an impact on the value of the property. Once your home inspection contingency has expired, you no longer have the leverage to go back and renegotiate with the seller to resolve any issues revealed by the home inspection. If there are material defects, you and your real estate agent should renegotiate either a reduction in the purchase price to offset the cost of any necessary repairs or having the seller make the repairs prior to the close of the transaction. Buyers with limited cash reserves should most likely negotiate to have the repairs made prior to closing.
31. Are termite inspections required?
A termite inspection is required by the lender if it is listed in the purchase contract. The lender may also require an inspection if the appraisal states there is evidence of termite damage. On FHA loans inspection is required only under the following circumstances: when there is evidence of an active infestation, if mandated by the state or local jurisdiction, if customary to the area, or at the lender’s discretion.
If termites are present it is up to both parties to determine who will be responsible for the remedy of the problem. When you negotiate your contract make sure you state upfront whether you want the property checked for termites.
32. What is seller rent back?
It is often the case that when the buyer and seller are unable to agree upon a specified closing date for the transaction, the real estate agents will negotiate a “rent back” period. This means the transaction closes, the loan funds and ownership of the property is transferred into the buyer’s name, but the buyer 71 does not take occupancy of the property until several days later. In this scenario, the buyer sets up a rental agreement, in which the property is leased back to the seller.
An important footnote to this somewhat common strategy is to make sure the seller is not occupying the property in a lease agreement for more than 30 days after the close of the purchase transaction. This would constitute a non-owner occupied purchase in the lender’s eyes and would cause the terms of the loan to change radically.
33. What are seller contributions?
Depending on the seller’s eagerness to close the transaction, the seller of a property will often become aggressive and offer to pay some or all of the closing costs, origination points, and/or pre-paid items (interest, hazard insurance, tax escrows) associated with the purchase on the buyer’s behalf. This common strategy can be very beneficial to the buyer, particularly if the buyer is short on funds to close. It can also be the vehicle that effectively drives the interest rate down and provides the buyer with a more affordable monthly payment.
For most loan programs, the seller contribution cannot exceed 3% of the purchase price. The lender will not permit the seller to contribute funds back to the buyer after the close of the transaction to accommodate repairs to the property. Items such as roof leakage or new carpet may not be covered by any seller contribution clause. So, the seller contribution can only be adjusted against closing cost or for a reduction in the purchase price.
34. What is earnest money?
Earnest money is money deposited by a buyer to confirm intent to purchase and to ensure the buyer’s best efforts to complete the sale as defined by the contract.
35. How does earnest money work?
When you make an offer to buy residential real estate you pay a sum acceptable to the seller by way of earnest money. The amount varies based on geography, home price, local regulation, and the state of the market at the time of negotiations.
In a real estate market with limited inventory that will typically be referred to as a “Seller’s Market”, your earnest money- or lack thereof- can make or break your deal for several reasons.
If you fail to meet your obligations as defined in the purchase contract you can, and sometimes will, forfeit your earnest money deposit (EMD).
An EMD should be held by a third-party escrow company per the terms of the executed purchase contract.
The Process
36. What will a loan processor look for when figuring out qualification?
37: If I had filed for bankruptcy, do I qualify for a mortgage?
With Chapter 7 bankruptcy you need to wait for 4 years before which you can qualify for a conventional mortgage. With Chapter 13 bankruptcy 24 months must elapse from the discharge date or 48 months from the dismissal date.
38. How do I qualify for an FHA loan after bankruptcy?
The wait period for an FHA loan after Chapter 7 bankruptcy is two years. To qualify for an FHA loan after Chapter 13 bankruptcy, the following guidelines apply:
39. How do I qualify for a VA loan after bankruptcy?
A two-year wait period is required after Chapter 7. For a Chapter 13 bankruptcy – one year into a payment plan is required with all payments made on time. Court permission to enter into a new mortgage is required too.
40. What if I am on contract employment?
If you are on a contract and don’t get paid a pay stub on a regular basis or get paid a 1099, you would be considered self-employed. In this case, your income could be averaged over the last 2 years to arrive at the qualifying income. That could mean your qualifying income could be less than your current income. Also, if you have claimed deductions for your expenses in your tax returns, that will be adjusted against your income.
41. Can one spouse’s low score negatively affect the couple’s chances of securing a mortgage?
If a couple is applying for credit jointly, then yes. One person’s lower score can negatively impact the interest rate the couple will be offered. This is because every borrower has three credit scores, and lenders use the lowest “middle” credit score of the two borrowers. We have seen many situations in the past in which one borrower was dropped from the application – but only if the lower score belongs to a non-working spouse.
42. Could one spouse’s bad credit negatively affect the other?
Yes, if one borrower has negative credit items, such as late payments or a foreclosure, the worst of the two will be taken into account when considering your mortgage application. With a foreclosure, this could mean having to wait up to 4 years to be eligible for a loan again.
43. Does the lender use both people as a measure of creditworthiness, or is it possible to focus on the spouse with the better score?
In the past, this was possible, but now the lowest score of the two (or however many) people are on the application is used. This could also include parents that are co-signing a loan for one of their children.
44. Why is your credit score so important?
The credit scoring model seeks to quantify the likelihood of a consumer to pay of debt without being more than 90 days late at any time in the future. Credit scores can range between a low score of 300 and a high score of 850. The higher the score, the better it is for the consumer, because a high credit score translates into a low interest rate. This can save literally thousands of dollars in financing fees over the life of the loan.
Only one out of 1,300 people in the United States have a credit score above 800. These are people with a stellar credit rating that get the best interest rates. On the other hand, one out of every eight prospective home buyers is faced with the possibility that they may not qualify for the home loan they 84 want because they have a score falling between 500 and 600.
45. What goes into determining a credit score? (5 Factors)
Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments, and charge-offs all have a negative impact. Missing a high payment will have a more severe impact than missing a low payment, and delinquencies that have occurred in the last two years carry more weight than older items.
This factor marks the ratio between the outstanding balance 85 and available credit. Ideally, the consumer should try to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home.
This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area.
A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards only.
This percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a six-month period. Each “hard inquiry” can cost from two to 25 points on a credit score, but the maximum number of inquiries that will reduce the score is ten. In other words, 11 or more inquiries within a six-month period will have no further impact on the borrower’s credit score. Note that if you run a credit report on yourself, it will have no effect on your score.
Remember that the credit score is a computerized calculation. Personal factors like income or assets are not taken into consideration when a credit report is generated. It is merely a snapshot of today’s credit profile for any given borrower, and it can fluctuate dramatically within the course of a week.
46. How does a low credit score affect my interest rate?
Lenders estimate your ability to pay back money based on your credit score. The risk factor they take on is built into your interest rate as a financing fee. Therefore, a low credit score results in a higher interest rate, higher monthly fees, and a higher amount of interest being paid over the total life of the loan.
A borrower with a credit score of less than 640 would be questionable to an underwriter. While the lender may agree to provide financing, the increased interest rate is factored into the monthly payment.
47. What if I have no credit?
Establishing a good credit history has never been as important as it is today. It’s not just that you’ll need good credit to get decent rates when you’re ready to buy a home or a car. Your credit history can determine whether you get a good job, a decent apartment, or reasonable rates on insurance. It’s a classic Catch-22: You’ve got to have credit to get credit.
48. How do I start building credit?
If you’re just starting out, you have a once-in-a-lifetime opportunity to build a credit history the right way. Here’s what to do, and what to avoid.
The fastest way to establish a credit history can be to “borrow” another’s records, either by being added to a credit card as an “authorized” or joint user or by getting someone to co-sign a loan for you.
Being added as an “authorized user” has its risks, for you as well as the person giving you access to the card.
If your father makes you an authorized user of his credit card, for example, his history with that account can be imported to your credit bureau file, giving you an instant credit record. If he has handled the account well, that reflects well on you. But if he hasn’t, his mistakes would also become yours.
Even if you trust the person adding you to the card, you may not be able to piggyback on his or her credit. Some credit issuers won’t report authorized users to the credit bureaus, particularly if the user is not married to the original cardholder. If the point is to give you credit history, the person who’s adding you as an authorized user should call the issuer and ask how (or if) your status as a user will be reported.
If you can’t get a regular credit card, apply for the secured version. These require you to deposit money with a lender; your credit limit is usually equal to the deposit. Your credit union, if you have one, is a good place to start looking for a secured card. You can also check with the bank where you have your checking account. However, if the issuer doesn’t report to the credit bureaus, the card won’t help build your credit history.
To get the best credit score, you need a mix of different credit types including revolving accounts (credit cards, lines of credit) and installment accounts (auto loans, personal loans, mortgages). Credit Unions are usually more lenient in approving an installment loan even with a short credit history.
For a credit score to be generated, you have to have had credit for at least six months, with at least one of your accounts updated in the past six months.
Using your cards regularly should ensure that your report is updated regularly. It also will keep the lender interested in you as a customer. If you get a credit card and never use it, the issuer could cancel the account.
Ultimately, experts say that it is best to have three to five credit cards and no more than that.
We had these in the initial launch, but including them here as well anyways >>
49. What is a fixed-rate mortgage?
These mortgages have the same interest rate through the term of the loan. If a loan starts with say 4.5%, the rate would remain the same till the end of the term. The most common terms for fixed-rate mortgages are 30 and 15-year fixed. But 25, 20, and 10-year fixed options are also available.
50. What is an adjustable-rate mortgage?
These are also called ARMs or Variable rate mortgages. On these loans, the interest rate is fixed for a certain number of years and becomes variable after that. The most common are 5, 7, and 10-year ARMs in which the rate is fixed for 5, 7, and 10 years respectively. The term of the loan almost always is 30 years.
51. How do adjustable-rate mortgages work?
Adjustable Rate Mortgages have three main features: Margin, Index, and Caps. The Margin is the fixed portion of the adjustable rate. It remains the same for the duration of the loan. The Index is the variable portion. This is what makes an ARM adjustable. Margin + Index = Interest Rate.
It’s important to understand that there are many different indices: The 11th District Cost of Funds (COFI), the Monthly 90 Treasury Average (MTA), The One Year Treasury Bill, etc. The most common is the one-year Libor (London Interbank Offered Rate).
The third and final component of Adjustable Rate Mortgages is Caps. Caps limit how much the rate can fluctuate over time. Annual Caps limit changes to the annual rate, whereas Life Caps provide a worst-case scenario over the life of the loan.
52. When do you pick an ARM vs. Fixed Rate?
When you are trying to decide on whether to take an Adjustable Rate Mortgage or a Fixed, you should consider two factors:
Let me elaborate on this: rates on ARMs are usually lower than fixed-rate loans. But the rates are fixed usually only for 5 or 7 years. If you plan to live in your house for more than that period, you may risk your mortgage adjusting to a very high rate prevalent at that time. However, if the current interest rate difference is substantial you may still want to take the risk.
For example, let’s assume for a $400,000 loan the fixed rate is 5.25%, while for a 5 year ARM the rate is 4.5%. The payment on a fixed rate would be $2209, while for the ARM that would be $2027, saving you $182 a month. In 5 years, you would have saved $10,920 in monthly payments with ARM. If the rate on the ARM adjusts to 6% after that and assumes you pay at that rate for the next 25 years, then you would pay $2349 per month for the next 25 years. So, on the ARM loan, you would pay $121,620 for the first 5 years and then $704,700 for the next 25 years, a total of $826,320. On the 30 years, fixed-rate loan over 30 years you would pay $2209 x 360 = $795,240.
As you can see in the example if you were to keep the house for 5-7 years it absolutely made sense to get an ARM. However, if you kept the loan for 30 years the fixed-rate option made more sense. In your case, the numbers may be different. Also, for an ARM it’s impossible to predict the future interest rate. Make sure you factor in both aspects mentioned above before deciding on what kind of loan program works better for you.
53. What is an interest-only mortgage?
In a mortgage like this, the monthly payment goes towards the payment of only the interest. So, the principal balance remains the same. After a certain number of years (say 5 or 7 or 10) an Interest-only loan converts to a fully amortizing loan, meaning that payment is required to be made towards both principal & interest.
These loan programs are not just difficult to qualify for, they are typically not recommended for first-time buyers. One of the benefits of home buying is forced savings by creating equity in your home by paying down the loan principal. On an interest-only loan, you will not be paying down the loan balance for several years.
54. What is a prepayment penalty?
A prepayment penalty is a fee charged to borrowers that make full payment on their mortgage or pay off a substantial portion (generally anything exceeding 20% of the total loan amount), ahead of schedule. This is a clause written into some contracts to protect the lender’s book of business in exchange for providing a lower interest rate, or for providing financing to a high-risk borrower.
Prepayment penalties vary with different lenders but generally apply to a one, two, three, or five-year period. This fee can be expressed as either a specific number of months’ interest or a percentage of the outstanding balance. A ‘hard’ prepayment penalty applies to either the refinance or the sale of a property. A contract written with a ‘soft’ prepayment penalty permits the borrower to sell their property without incurring a penalty but does restrict refinancing for a set period.
All the loan programs offered by government agencies like Fannie Mae, Freddie Mac, Veterans Administration (VA), and Federal Housing Administration (FHA) do not carry any prepayment penalties.
55. What are conforming loans?
These are loans that meet the guidelines of Government Sponsored Enterprises (GSEs) namely Fannie Mae & Freddie Mac. The basic conforming loan limit for 2020 is $510,400. These loans require a minimum down payment of 3%.
56. What are conforming high balance loans?
In some high-cost areas like San Francisco, CA, a higher conforming loan amount is permitted. The highest conforming high balance limit for 2020 is $765,600. The minimum down payment on these loans is 5%.
57. What are jumbo loans?
Loan amounts over the conforming limit are considered Jumbo loans. These loans are not funded by the GSEs and do not need to follow their guidelines.
58. What are VA loans?
These mortgage loans are available to eligible US veterans. A veteran must have served 180 days of active service. VA guaranteed loans are made by private lenders, such as banks or mortgage companies, for the purchase of a home for a buyer’s own personal occupancy. You can get these loans with absolutely no down payment. The maximum amount for the VA Home Loan Guaranty Program for 2020 will be $510,400 in most counties. In higher-cost counties, the loan limit can be as high as $2.5 million.
59. What are USDA home loans?
A USDA (United States Department of Agriculture) home loan is a government-guaranteed home loan that lends up to 100% of the purchase price and may even include some closing costs. These are only offered in rural areas and have loan limits based on geographic location or income limits based on family size.
Guaranteed by the USDA, this program might make you think that you must buy farmland or live “in the country” to qualify, but this is often not the case. In fact, you might be surprised to see just how many neighborhoods qualify as rural development areas. For this program, the term “rural” applies to those areas with a lower population or fewer homes, and not necessarily to those areas and neighborhoods that are far outside of the city.
Benefts
To know more about these loans, visit USDA rural development home page at rurdev.usda.gov
60. What is private mortgage insurance?
If you do not have a 20% down payment, the lender may allow a smaller down payment, sometimes as low as 3.0%. However, with a smaller down payment, borrowers are usually required to carry private mortgage insurance (PMI) on the loan. Private mortgage insurance comes in two forms: upfront – paid at closing, and/or monthly. A lender may require some combination of both upfront and monthly mortgage insurance. The amount required is determined based on program type, property type, credit score, and the loan-to-value ratio.
In most cases, PMI can be canceled once the accumulated equity has reached 20% or 22% of the home’s value.
Choosing PMI is not a one-size-fits-all decision. It’s a loan consultant’s job to weigh borrowers’ long-term goals and to provide comprehensive solutions that clearly explain all of the pros and cons of each mortgage option available.
61. What is a piggyback loan?
“Piggyback Loan” is a slang term, which really is another way of describing 1st and 2nd mortgages that close concurrently. Huh? What? Let me explain.
A certain type of Piggyback loan is called an 80/10/10 loan. In this kind of loan, the first mortgage is 80% of the home value, the second mortgage or Home Equity Line of Credit (HELOC) is 10 % and the rest 10% is the down payment by the borrower.
62. What are the benefits of an 80/10/10 loan?
Other than eliminating mortgage insurance, an 80/10/10 loan can help you qualify for a higher loan amount and hence buying a bigger home.
Another way to eliminate paying monthly (or one time) mortgage insurance is to get a Lender Paid Mortgage Insurance (LPMI) loan. The interest rate on these loans is higher than loans with PMI. But, since there is no monthly PMI premium to be paid, the total mortgage payment is usually lower than the loan with monthly PMI.
63. Should I pay points or not?
Points are up-front fees paid to obtain a better interest rate on a loan. One point equals one percent of the loan amount. A lower interest rate may result in a lower monthly payment, but it is important to consider how long you intend to be in the loan, and to compare current rates to historical market trends.
If you take out a $300,000 mortgage and decide to pay one point, this translates into an up-front closing cost of $3,000. Assuming, paying a point upfront saves $100 a month, it will take 30 months to recuperate the cost of that point. If you decide to refinance or sell the home before the 30-month mark, your money is lost. In this case, you would benefit financially only if you are keeping the loan for longer than 30 months.
64. When should you pay points?
Rates run in cycles. When rates are at historical lows, it is sensible to pay points if you plan to live in the home for an extended period of time. It is unlikely that rates will go down; hence, there will be no need to refinance. When rates are up, there is a strong likelihood that they will come down. This is no time to pay points. The chances of refinancing in the future are extremely high, and you will likely not be in the loan long enough to recuperate the cost of the points.
65. What is title insurance?
Title insurance is a policy that is usually issued by a title company to protect the lender against something that might have happened in the past, rather than something that might occur in the future. An extensive search of public records is conducted by the title company to validate who has held title to the property in the past. The lender wants to know if there are any liens, judgments, or easements on the property that they should be aware of.
But title insurance also guards against hidden risks or unknown factors that might cause an encumbrance at some point in the future, such as unknown heirs, forged deeds or wills, misinterpreted wills, false impersonation of the true owner of the property, deeds signed over by persons of unsound mind, or defects in the recording of past titles. Title insurance covers the cost of the title search and any legal fees that may result from any dispute over past property ownership. It is required by the lender and paid for by the buyer.
Any smart home buyer will also purchase title insurance to protect their own interests. This is a one-time premium that protects the buyer or their heirs, for as long as they retain an interest in the property.
66. How to reduce Cash to Close?
Cash to close is the money that you need to bring to the closing table. This is a sum of:
If you can reduce one or more of these 3 items, you can essentially bring down the cash you need to close on your home purchase.
67. How do you reduce a down payment?
Down payment can be reduced by choosing a loan program 106 that has a low down payment requirement like an FHA Loan or a USDA loan.
68. How do you reduce closing costs?
Paying a slightly higher interest rate may result in the lender not charging you any origination points. In some cases, they may even credit you for some closing cost. You can also request the seller to pay for some part of your closing cost
69. How do you reduce pre-paids?
Not much can be done with pre-paids. Also, the effect on the total cash to close is minimal. However, if you close towards the end of the month, you pay lesser pre-paid interest. Also, closing the transaction in certain months could translate into lesser reserves for Property Taxes. If the loan so allows, waiving impounds will significantly reduce the cash to close amount.
70. What is down payment assistance?
Down Payment Assistance (DPA) programs have been around in some form for decades and they have proven a valuable resource in helping some of our underserved demographics secure the homeownership dream.
Even though we tend to talk in terms of “down payment” assistance, most of the programs can also be applied to your closing costs that are incurred on every purchase of a home. The majority of programs are designed to help first-time buyers and responsible low-income borrowers.
DPA programs are far from easy money and are most effective when a borrower (and their loan officer) have educated themselves on the programs available in their area. Most of the programs are funded with local dollars.
71. How do you qualify for down payment assistance?
Although we are painting with broad strokes, the majority of down payment assistance programs carry the same three major restrictive guidelines:
Most down payment assistance programs (DPA) require approval from your first mortgage before approval of the program.
The first mortgage is usually required to be a 30-year fixed and is usually FHA, VA, USDA, or less often, but even more powerful is using assistance with a conventional first mortgage.
If you are using down payment assistance, the lender is required to overlay additional, usually more restrictive, underwriting guidelines.
72. What are monthly housing payments comprised of?
Monthly housing payment consists of the following:
73. How do you reduce monthly housing payments?
Property taxes and HOA dues cannot be changed. Mortgage Insurance may be reduced or eliminated by following suggestions made earlier in the chapter. You can shop for a Homeowner’s insurance policy to get a better premium rate. But the biggest component of housing payment is of course Mortgage Payment.
There are only one of 3 ways to reduce it:
74. What is a home inspection?
State laws do not require to have a home inspection or the number of inspectors you should bring. But, it is in your best interest to get a general inspection done. Sometimes, sellers provide you with a copy of the inspection report. You can consult with your agent to decide if you want to accept those recommendations or conduct one by yourself.
General inspections are relatively inexpensive costing between $200 and $600 depending upon the house’s square footage. Specialized inspections vary widely in cost depending upon what you need to get done.
75. What is included in a general inspection?
If you use a licensed inspector, the inspection will include all items listed on the Standard Inspection List.
Standard Inspection List Inclusions:
76. What is not included in a general inspection?
Pool, hot tub, sauna, playground equipment, security system, seawall, break wall, or dock are not included in the general inspection.
77. Should you be present during the general inspection?
It makes sense to be present if possible when the inspection is being done. You can see things for yourself and also ask questions. Plan to spend 2-3 hours, so make sure you dress comfortably and wear clothes you don’t mind getting dusty.
You can share the past inspection reports and any disclosures the seller shared with you with the Inspector so that he can follow up on those findings. At the end of the inspection ask your questions and ask the inspector for a summary of his findings.
78. Do you need specialized inspections?
You may need a specialized inspection if:
79. What is an appraisal?
An appraisal is a professional estimate of the value of the property that you are planning to purchase. The person who does the appraisal is called an appraiser.
80. Why do we need an appraisal?
Lenders always require a home appraisal before they will issue a mortgage. They do this to protect their investment. If the actual market value of the property is lower than the sales price, and you default on your mortgage, the lender won’t be able to sell the property for enough money to cover the loan.
81. How much do appraisals cost?
It usually costs between $450-$800 for an appraisal, depending on your property type and location. More expensive homes or homes that have more than 1 unit usually cost higher to get appraised.
82. How long do appraisals take?
The appraisal process could take anything between 3-14 business days. The appraiser sends the report to the mortgage lender, but you have a right to receive a copy of the appraisal report if you have paid for it.
83. How does the appraiser arrive at the property value?
The most important component in arriving at the value is what is called comparable sales (or comps in short). These are similar properties located typically within a mile and have sold in the last 90-180 days. The appraiser compares mainly the below features of the property against the comparables to arrive at the value:
So, a large 4-bedroom home in an area where mostly 3 bedroom homes have recently sold will have a higher value, and a house with peeling paint and a patchy lawn in a well-manicured suburb will appraise at a lower amount than otherwise similar properties.
84. What if the property appraises for less than the sales price?
While deciding your loan amount as a percentage of property price (Loan To Value Ratio or LTV), the lender will pick the lower of the sales price or appraised value. If the property appraises at the same or higher than the sales price, you will still get the same loan amount you applied for, but if it appraises for less, the lender will reduce the loan amount to match the value of the home according to the appraisal.
Though it can cause everyone involved in the transaction to panic; note that there are several options for the deal to still go through. If you wrote your offer contract to include a contingency requiring the property to be valued at the selling price or higher, you can:
85. How do appraisers value property that has not been built yet?
It’s obviously easier to picture the process of estimating value on an existing property in a neighborhood that has a history of home sales, but the task of determining the value on new construction projects does pose some challenges.
Appraisals on homes that haven’t been built yet generally require the contractor and home buyer to supply more documentation in order to get a more accurate estimate of the property’s value
86. What does an appraiser need for new construction?
The plans or construction drawings are usually done by your builders or architect. It lays out the floor plan of your home, sizes of rooms, and square footage of your home. They should include a floor plan layout, front elevation, rear elevation & side elevations, mechanical and electrical details.
A “Spec” sheet has the type of construction materials you will be using. It also contains the type of insulation, roofing, and exterior products that will be used in the construction, as well as floors, counter tops, and appliances for the inside.
The appraiser would need the document that breaks down all the costs associated with the construction, including land, building materials, and labor.
Shows where your home will sit on the site, any accessory buildings, well and septic locations, if applicable, and the finish grade elevations and direction of the drainage.
The appraiser will analyze all this information. It is the appraiser’s job to determine what the future value of the home will be once it is completed, per your plans, specs & cost breakdown.
Even though an appraiser will use the cost approach in the appraisal report, it is not the value that will ultimately be used by the lender. The market approach to value, which uses existing sales of homes similar in size, quality, construction, and the location is the most common approach that lenders want 130 for new construction.
The more complete and detailed your plans, specifications, and cost breakdowns are, the more accurate your appraisal will be. Once your home is complete, the appraiser will be asked to go out and inspect the home again. They will report back to the lender what they have found, whether your home was completed according to the plans and specifications originally given, and if the value is the same as originally given in the report.
Sometimes the value has to be adjusted due to changes that were made during construction or if the value of the homes in the area were impacted due to any reason.
87. Why do you need insurance for a house?
Basically, the lender won’t fund the loan on a property that isn’t insured, and the lender will often require certain types of insurance and at a specific financial level (usually at least the amount of cost of replacement) to make sure they won’t lose their money in the event of a disaster.
Also, depending on the geographic area you may need to carry specific types of insurance, like earthquake or flood insurance.
88. What are the types of insurance coverage?
Most insurance policies have several sections, each one covering a different aspect of homeownership:
Pays for damages to the structure of the home, outbuildings, detached garages, etc.
Covers household items, including furniture, clothing, appliances, and electronics which are damaged or stolen. After an event, many people find that they have a lot more stuff than is covered in their policy; do an inventory and videotape your possessions.
Protects you against financial loss if you are found legally responsible for someone else’s injury or property damage. Medical payments: pays the medical bills for anyone injured on your property (and some injuries away from the property, for example, if your dog bites someone).
Covers living expenses if your property is destroyed or too damaged to live in while being repaired.
Many lenders and some states require a specific policy for food insurance if your property is in the flood zone.
89. How does the underwriting process work?
Once the underwriter receives income, asset, credit documents from you along with supporting documents such as purchase contract, title report, and appraisal report – she is in a position to take a decision on your loan qualification. The outcome of her review is one of three – Approved, Denied, Approved with conditions; the last option being the most common. What “approved with conditions” means is that your loan is approved, but you may need to provide some more information and/or documents. Sometimes even a third party like a title company, appraiser, or home inspector may need to provide additional documents before the loan can be “final approved”.
90. How does the closing process work?
After the loan is “final approved” or approved without conditions, you are only steps away from being a homeowner. At this point, you are so close, you can almost taste it. Loan documents from the lender are released to the title company. The documents are signed by all the borrowers in presence of a notary (including their spouses in some states). The lender then funds the loan and wires the funds to the title/escrow company. You are recorded as the new owners in the county records. In some States, these last 3 steps happen on the same day. And with that, you are now officially a homeowner!
91. How do you hold title?
When you buy a home, you need to decide how you will hold ownership or “title” of that home.
Title to real property may be held by individuals, either in Sole ownership or in Co-ownership. Co-ownership of real property occurs when title is held by two or more persons. There are several variations of how a title may be held in each type of ownership.
92. What are examples of sole ownership?
A Man or Woman who is not legally married.
A Man or Woman who having been married is legally divorced.
When a married man or woman wishes to acquire title in his or her name alone. The spouse must consent, to quitclaim deed or otherwise, to transfer thereby relinquishing all right, title, and interest in the property.
93. What are examples of co-ownership?
Husbands and wives who acquire properties in the community property states of California, Nevada, Louisiana, Wisconsin, Texas, Arizona, Washington, Idaho, and New Mexico can take title as community property. Each spouse then owns half the property, which can be passed by the spouse’s will either to the surviving spouse or someone else.
Under community property, both spouses have the right to dispose of one half of the community property. If a spouse does not exercise his/her right to dispose of one-half to someone other than his/her spouse, then the one half will go to the surviving spouse without administration. If a spouse exercises his/her right to dispose of one half, that half is subject to administration in the State.
A form of Co-Ownership by two or more individuals (none of which can be a corporation, partnership, Limited Liability Company, or trustees of a trust) in equal shares, by a title created by a single transfer, when expressly declared in the transfer to be a joint tenancy. The joint tenants must derive their title at the same time from a single transfer, share identical interests, and have equal rights of possession. On the death of one CoTenant, the survivor or survivors take no new title but hold the entire estate under the original transfer.
This is a form of Co-Ownership with two or more individuals or entities. The interest of each individual or entity may or may not be stated and may not be equal. A Tenant in Common has the right to deal with its interest as it sees ft – sell, lease, gift, etc.
Title to real property may be held in a title holding trust. The trust holds legal and equitable title to the real estate. The trustee holds title for the trustor/beneficiary who retains all the management rights and responsibilities. There are many advantages to holding title in a trust, such as avoidance of probate costs and delays.
Note that there is a cost of creating a living trust and deeding real property into the living trust. If the trustor becomes incompetent, the named alternate trustor (such as a spouse or adult child) takes over the management of the trust assets. When the trustor dies, the assets are distributed per the trust’s terms.
The preceding summaries are a few of the more common ways to take title to real property. For a more comprehensive understanding of legal and tax consequences, appropriate consultation with your attorney and/or CPA is recommended.
94. What are pre-owned home warranties?
Covers normal wear and tear, but not major pre-existing conditions, usually offered in homes 5 years and older.
Usually between $250 and $600/year, with deductibles of $25-$100, and service fees ranging from $10-$100 per call.
Purchased by:
To make the property more attractive and minimize disputes after the sale, or as part of the negotiation with the buyer.
A common thank you gift to the buyers celebrating a successful transaction.
In case both seller and real estate agent don’t pay, it may be a good idea to get a home warranty on your own.
Most policies are renewable at the end of the year.
95. What are new home warranties?
New home warranties are purchased by the developer and they can last for as long as 10 years. It usually covers the roof, structure, and foundation. Add-on coverage can include construction workmanship, materials, and the home’s mechanical systems.
If an appliance or system of your home that is covered under the warranty breaks.
96. How do you choose a home warranty?
Make sure you are working with a reputable company (check the Better Business Bureau for complaints) and ask:
97. How will you know which Realtor is right for you?
Seek to work with an experienced real estate professional that works with buyers on a regular basis. A real pro will go the extra mile to show you that they will look out for your best interest and gain your respect. Sincerity is the keyword here. This type of real estate agent will act promptly to get you information about their team and their methods of doing business, along with quotes and references from past clients.
98. Who is better – mortgage broker or a bank loan officer?
The loan officer at a bank, credit union, or other lending institution are employees who work to sell and process mortgages and other loans originated by their employer. They often have loan types that originate only from one lending institution, thus limiting the options for you. Mortgage brokers are professionals who are paid a fee to bring together lenders and borrowers. They usually work with dozens of lenders, not as employees, but as freelance agents.
A mortgage broker will usually have more options, better pricing, and a wider selection of loan products. But a bank loan officer may have better control over the loan process. At the end of the day, it’s their individual expertise and your comfort level that should decide who you go with. But stay away from online companies who only have a website and a toll-free number. These are usually faceless organizations touting great rates but often have terrible customer reviews. Going through a mortgage process for the first time could be stressful sometimes; hence you would need someone who is more reputed and accessible.