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FREQUENTLY ASKED QUESTIONS
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Q.
Why do interest rates go up and down all the time?
A. Because lenders pool loans into
securities and then sell them in "the secondary
market." They are competing with the entire pool of
world-wide investment opportunities. Any
inflationary news translates into smaller values
for fixed-rate securities and necessitates a rise
in mortgage interest rates.
Thus, people in the mortgage
business are hoping for lousy economic news which
translates into little or no inflation and low
mortgage interest rates.
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questions
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Q.
What is an IRS 4506?
A.
This forms purpose is to verify that the tax returns
you give us are the same one's you sent to the
IRS. IRS 4506
and 8821 are forms which allow the lender to
receive an electronic abstract of your tax
returns. In this day of scanners, laser printers,
and tax preparation software it is easy to prepare
a set of tax returns to submit to the lender.
Please understand no information will be provided
to the IRS. Information is only being obtained
from the IRS.
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Q.
What is a FICO®
Score?
FICO scores are
numeric representations of your credit profile.
The higher the FICO score the better credit risk
you are.
FICO is a product of Fair, Isaac Company. These
have been around for several years but started to
be used in the mortgage lending business in 1995
for the purpose of keeping down the expense
associated with Home Equity loans. You needed a
certain minimum score to get such a loan..
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questions
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Q.
Down
payment?
A. You can get a home with as little
as 0% down payment. If your down payment is less than
20% of the purchase price, or 20% of the appraisal
for a refinance you will need Private Insurance
(PMI). The down payment must be well-documented.
That is, you must show, for example, bank statements
proving that you have had the money for at least
2 months. If the source of the down payment is
a gift from a relative you will need:
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"gift letter" |
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from the accounts of the gift-giver
showing that they have had it for at least 2
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copy of the check from them to you and a copy
of the deposit slip showing it going into your
account.
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The purpose of all this is to
make sure that the down payment is not a loan
and most especially not coming from the seller.
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Q.
Do
I need Private Mortgage Insurance?
A. Private Mortgage Insurance (PMI)
is needed on all loans where the loan-to-value
(the loan amount divided by the value of the property)
exceeds 80%. (There are some examples of "self-insured"
loans where the rate is increased and there is
no formal PMI but you pay one way or another.)
The mortgage insurance premium depends on the
loan-to-value ratio. It is 3-tiered: 80.01%-85.00%,
85.01% to 90.00% and 90.01% to 95.00% each step
costing more. The mortgage insurance also depends
on the loan amount and the type of loan. Adjustable
rate loans have higher premiums than fixed rate
loans. At the present time you can choose between
monthly and annual premiums. The PMI is given
by a different party than the lender. Your lender
will send a copy of your loan application package
to the MI company for their approval. Among the
loan documents you will sign at closing is a PMI
agreement. Your lender will "impound"
the PMI payment along with your principle and
interest. It is usual that when your loan-to-value
equals or exceeds 90% your property tax is also
impounded. PMI policies usually have "escape"
clauses describing under what conditions you can
stop paying PMI. It is necessary that you read
the PMI policy to determine this. Make no assumptions.
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questions
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Q.
What
is Pre-Qualifying?
A.
Pre-qualifying is a process whereby
a loan officer takes information about you, either
over the telephone or face-to-face and indicates
how big a loan of a particular type you will qualify
for. The lender would then give you a "pre-qualifying
letter" which is of considerable value in
dealing with a Realtor or a potential seller.
Realtors and sellers are interested in dealing
with people whom they know to be able to get the
loan necessary to close the deal. We prefer to
get the income and asset information from you,
get a loan application and pre-qualifying credit
report and then write the letter. We are willing
to make exceptions if time is critical.
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Q.
What
is pre-approval?
A.
A Pre-approval is a step beyond
pre-qualifying. In a pre-approval we send the
credit part of the loan package to the lender
and get you approved for a certain type
of loan with a particular lender before you have
found or made an offer on a property.
With a pre-approval you can close
the loan faster and often will find your offer
more acceptable to the seller. Sometimes sellers
are anxious and will take somewhat less in price
from someone who can close quickly.
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Q.
Is
the lender you find for me going to resell my loan?
A. You should assume that your loan
will be sold. The good thing about this is that
the marketability of pools of loans as "Mortgage
Backed Securities" has led to lower rates.
The annoying thing is that your loan may get sold
a couple of times in the first year and you have
to keep track of whom you have to pay. This is
an inconvenience, particularly since they may
be in another state and time zone. But it is,
we feel, an inconvenience that we all put up with
for the sake of lower rates.
As part of the loan documents
you will be asked to sign a form granting recognition
to the fact that your loan may be sold. You will
also be provided with a form from the lender indication
what percentage of their loans have been resold
in recent years.
Keep in mind that there is a Federal
regulation which gives you the ability to make
payments to your old lender for a period of time
after your loan is sold. This will protect you
from having your payment reported as "late"
if you send it to the old lender soon after it
is sold. Protect your rights in this regard.
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Q.
What
if the lender you find or someone they sell my loan
to goes out of business?
A.
People sometime ask: If the lender
you find for me goes out of business or becomes
insolvent can I be forced to pay my loan off early.
The answer is No, never. If the ownership of your
loan is transferred because of failure it is still
governed by the original note and deed of trust.
Your note cannot be accelerated and your rate
cannot be modified as a result of the failure.
(Interestingly enough, this is not true of the
savings or CD account you might have with a failed
institution. There the principle maybe guaranteed
by the interest isn't.)
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