Mortgage Terms

• What is the difference between a conventional loan and an FHA loan?
• What are VA loans?
• What is "private mortgage insurance"?
• What are "points" and "origination fees"?
• Should I choose a fixed rate or an adjustable rate mortgage?
• Should I lock my interest rate at application?
• What information will I need up front?
• What if I have had credit problems?
• How long does the loan process take?
• The Loan Process

What is the difference between a conventional loan and an FHA loan?

A conventional loan is not insured by the Federal Housing Administration and typically requires a 3 to 5 percent down payment. The maximum conforming loan amount is currently $417,000. Generally, underwriting guidelines are more strict than those for FHA loans. In most cases, if the borrower qualifies for conventional financing, it is a better option due to lower mortgage insurance costs, more program options, and less paperwork.

FHA loans are insured by the Federal Housing Administration and allow borrowers to purchase homes with lower down payments, as little as 2.25 percent. Loan limits vary by county; currently the Jefferson County limit is $302,500 for single family housing. FHA underwriting guidelines are often more lenient than conventional guidelines, thereby allowing borrowers who might not otherwise qualify for financing to purchase homes.

What are VA loans?

VA loans are mortgages insured by the Department of Veteran's Affairs. If you are a veteran, active duty service member, or member of the Reserves or National Guard, you may be able to obtain a VA loan requiring no down payment. The current maximum VA loan is $417,000. While most VA insured loans charge a VA Funding Fee (as a percentage of the loan amount) in lieu of mortgage insurance, veterans receiving VA disability benefits are exempt from the fee, making VA financing even more attractive. Eligible veterans and members of the military with down payments less than 20% may find VA mortgages to be their best financing option.

What is "private mortgage insurance"?

Private mortgage insurance provides protection for the lender against loan default and is typically required on conventional mortgages with down payments less than 20 percent. It is normally paid on a monthly basis and may be removed once the homeowner achieves 20 percent equity.

What are "points" and "origination fees"?

One point or a one percent origination fee is equal to one percent of the loan amount. Points represent prepaid interest paid at closing for the purpose of obtaining a lower than market interest rate. Origination fees are paid to the lender who originates the mortgage and may usually be avoided by paying a slightly higher than market rate. Careful analysis of whether or not the borrower should pay points and origination fees should be a standard part of the origination process.

Should I choose a fixed rate or an adjustable rate mortgage?

This decision is critical to the loan process, and no one answer is always appropriate. It is imperative that your loan officer carefully explain your options in order to taylor the program to your specific needs.

A fixed rate remains constant throughout the life of the loan, however you can expect to pay a higher rate for the elimination of any future rate risk. Adjustables are available in increments of 6 months, 1 year, 2 years, 3 years, 5 years, 7 years, and 10 years. Normally, the shorter the adjustment period, the lower the interest rate. If you know you will only own a home for the first 2 to 3 years, a loan that is fixed for 3 to 5 years may suit you well and save thousands of dollars compared to a 30-year fixed.

An adjustable rate mortgage (ARM) is a loan whose interest rate is adjusted according to movements in an index rate, such as the national average mortgage rate or the treasury bill rate. Usually, when the interest rate changes your monthly payment will change also.

ARMs tend to be offered with lower initial rates than fixed-rate loans. Fixed-rate loans are usually more expensive because you are buying protection from future increases in interest rates. No matter how high rates go, your monthly payment will always be the same. With an ARM, the consumer assumes part of an increase in interest rates, and so may receive a price break on the initial interest rate from the lender. You must consider whether a lower initial rate on the ARM is worth the uncertainty about possible future increases in your payments.

When shopping for an ARM, these are some of the questions to ask:

1. What index will be used to adjust your mortgage rate? Try to obtain a table showing movements in the index over the previous 10 years to see how your mortgage payments could change.
2. How often will your mortgage be adjusted? One year? Three years? Five years? The longer the adjustment period, the better you will be able to plan your future household expenses.
3. What is the initial mortgage rate? Does it include a special discount? If so, you could have a large increase in your monthly payments when your rate is adjusted for the first time.
4. What is the margin on your mortgage rate? The margin is the amount the lender adds to the index rate to calculate your mortgage rate. For instance, if the index rate is 10 percent and the margin is 2 percent, your rate would be 12 percent.
5. What limits or caps have been placed on the adjustments? One of the most important items to discuss with your lender is the maximum amount that your mortgage rate can increase both in any single adjustment period and over the life of the loan. Find out the “worst case” situation in the event of a sharp increase in your index rate.
6. Can negative amortization occur? If an ARM has caps which prevent your payment from rising to the level dictated by the index, you may incur negative amortization. Find out what limits there are on negative amortization.
7. Is your loan assumable? Assumability allows you to pass your loan on to a creditworthy person who wants to buy your home. This can be an attractive selling feature.
8. Does your loan convertibility allow you to change your ARM to a fixed-rate loan at some designated time in the future?
9. Is there a prepayment penalty? If you sell your house and pay off your loan early, you may be assessed a fee.

Should I lock my interest rate at application?

This may be the toughest question of all because no one can accurately predict the future direction of interest rates. Once you lock, normally the locked rate can not be lowered even if the market improves. However, if you initially choose to "float," rates may move higher prior to closing. An experienced, knowledgeable originator should be consulted to discuss and analyze your options.

What information will I need up front?

The most common items include two years' tax returns, two recent pay stubs, two months bank statements, account numbers and balances for assets and liabilities, and a two year history on employment and residence.

What if I have had credit problems?

You will need to provide written explanations of the circumstances. If the problems occured more than one to two years prior to the application, most lenders will accept your application.

How long does the loan process take?

The entire process will typically take 1-4 weeks, depending on the type of mortgage you are applying for. Your originator should be able to give you an accurate and realistic estimate at the time of application. In general, conventional loans are processed more quickly than FHA or VA.

The Loan Process

Time Frame:

The entire process from application to closing generally takes one to five weeks, depending on the type of mortgage being requested and the complexity of the borrower's circumstances.

Pre-Qualification:

More and more, home buyers are recognizing the advantages of "pre-qualifying" for a mortgage prior to shopping for a home. First, it enables the homebuyer to determine a "comfort range" of affordability, both in terms of what the lender will allow and what the borrower deems reasonable.

Second, it helps the buyer identify potential problem areas that may surface in the mortgage process and provides a "head start" in dealing with these issues. Finally, it gives the homebuyer a competitive advantage when submitting a bid for a home if the seller knows the purchaser will be able to obtain financing.

Mortgage Network does not charge for prequalification. To prequalify, the homebuyer will be asked to provide information regarding household income, total indebtedness, employment history, funds available for closing, and credit history. Mortgage Network will attempt to answer any questions of the homebuyer, and provide details of the various programs available and their related cost.

Pre-Approval:

Some circumstances merit the homebuyer taking an additional step toward loan approval. Such may be the case when a buyer has a limited time in which to purchase and close on a property due to relocation, expiration of an existing apartment lease, or the imminent sale and closing of a current residence. Another reason for preapproval might be concern over the approvability of a loan due to credit history, employment stability, or other factors.

During the pre-approval process the lender completes the loan application, verifies the information provided by the borrower, obtains a credit report, and submits the loan to an underwriter for approval. A complete loan approval is issued for a maximum loan amount subject only to satisfactory appraisal and title review of the property to be purchased. Mortgage Network charges $50.00 for the pre-approval, which is credited back to the homebuyer at closing.

The Application:

Whether or not the homebuyer has been pre-qualified or pre-approved prior to the home purchase, once a contract for purchase is accepted by the home seller, an application for financing must be made quickly, usually within 3 to 5 business days. The applicant will typically be asked to provide a two year history of employment and residences, including tax returns, paystubs, mortgage holder or landlord information, bank references and statements, creditor information, and proof of other assets, such as 401K plans, etc.

The lender will verify certain items, obtain a credit report, and have the property being purchased appraised to determine it's "market value." Once enough information is assembled to make a credit decision, the file is submitted to "underwriting," where the lender evaluates the borrower's credit risk. If statistically acceptable, the request is approved. If not, the borrower may be asked for additional information, explanations, or down payment. Mortgage Network makes every effort to find a way to make the loan approvable, even if it means changing programs or loan terms.

The Closing:

Once the loan has been approved by underwriting, the closing may be set. Individual states differ as to closing procedures, however in Kentucky, most closings take place at the attorney or escrow agent's office, with the buyers and sellers both present. The final documents are signed, the necessary funds are exchanged, and arrangements for possession are completed. The typical closing takes about one hour.

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