Frequently Asked Questions
Below, you'll find answers to the questions most commonly asked by our customers regarding mortgages and the lending process. We hope you'll find the answers to your questions here.
If you require further information that is not addressed here, please use our Loan Advisor to email us your specific question(s).
Conforming Loans are loans that meet Fannie Mae (FNMA) and or Freddie Mac (FHLMC) underwriting requirements. In other words, income, credit, and property requirements must meet nationally standardized guidelines. There are additional guidelines, pricing and restrictions regarding conforming loans for manufactured housing.
Conforming loans are subject to loan amount limits that are set annually by Fannie Mae and Freddie Mac. These limits vary based on the region in which the subject property is located as well as the number of legal units contained in the subject property. Under the FNMA and FHLMC Charter Acts, the loan limits are 50% higher for first mortgages in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
When FNMA and FHLMC limits don’t cover the full loan amount, the loan is referred to as a jumbo mortgage. The average interest rates on jumbo mortgages are typically higher than for conforming mortgages.
A high-balance mortgage loan is between a "conforming" and a "jumbo" loan. The loan amounts for a high-balance loan depend on the county you live in. Rates on a high-balance loan are typically higher than conforming but less than jumbo. Jumbo investors may have additional overlays and qualification requirements above FNMA/FHLMC.
Fifteen-year loans became quite popular in the 90′s. Thanks to historically low rates, borrowers can use a 15-year loan to pay off their home loans quickly without an unbearably high mortgage payment.
The benefits are simple: You will own your house free and clear more quickly and you will save a great deal of interest. For example, a couple in their mid 40s may like this concept knowing that by the time they reach age 60, they own their own home without having to make house payments. For a young couple in the mid 20s, it may not make as much sense as having a longer term 30-year loan.
The key to deciding is to compare the monthly payments and see how comfortable you are with the higher payments of a 15-year loan.
Let’s look at a $100,000 loan. Assume that the rate for a 30-year loan is 7% and that for a 15-year loan it is 6.5%. For the 30-year loan your monthly payment is approximately $665. For the 15-year loan it is approximately $871. That’s a difference of $206 per month.
For some people that extra $206 may be better utilized saving for a child's education or investing in an IRA. For others, it may be insignificant. Ultimately, you must decide. The good news is if you go with a 15-year loan in this example, your savings will be as follows:
30-year loan at $665 a month for 360 months = $239,400 in total payments 15-year loan at $871 a month for 180 months = $156,780 in total payments
For the short-term loan you would save $82,620!
If you want to pay off your loan early but can’t quite handle the payments on a 15-year loan, ask us about our 20-year loans. For those who want to pay off their loan even more quickly, our lending partner can offer a 10-year fully amortizing loan.
The traditional 30-year fixed-rate mortgage has a constant interest rate with monthly payments that never change for both conforming and jumbo loan programs. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, adjustable-rate loans are usually more cost effective.
As a rule of thumb, fixed-rate loans may be harder to qualify for than adjustable-rate loans. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run because you can lock in the rate for the life of your loan.
Adjustable-rate mortgage programs charge a fixed-interest rate for the first three, five, or seven years. After that time, the loan turns into a traditional fixed-rate loan for the remaining years on the life of the loan, based on the then-current interest rates.
When it comes to Adjustable-Rate Mortgages (ARMs), there is a basic rule to remember:
The longer you ask the lender to charge a specific rate, the more expensive the loan.
If you plan to own the house for three years or less, the perfect loan is one that is fixed for three years before starting to adjust. This way you'll benefit from the lower rate offered by an ARM without being subjected to the uncertainty of payments that could be higher. Similarly, if you think you'll be in the house for five or fewer years, the perfect loan is our loan that is fixed for five years before starting to adjust. The same logic applies to our loan that is fixed for seven years before adjusting.
By the way, the concept that loans can adjust should not be looked upon as always being a negative. Rates have generally trended downward for the past fifteen years, and many borrowers have seen their payments drop over the years.
For most people, the greatest benefit of fixed-rate loans is their predictability. Your payment will remain the same from your first payment till your last. While fixed-rate loans tend to have higher rates than adjustable-rate loans, people place great value on the psychological comfort of this predictability.
Why then would someone ever choose an adjustable-rate mortgage (ARM)?
Homebuyers often choose ARMs because the lower rates (a) make it easier to qualify and (b) may allow them to get a larger mortgage. Beyond this situation, an ARM product makes sense if you know you will only be in the home a short period of time. The increasingly popular 3/1, 5/1 and 7/1 ARMs are good choices for people who expect to move or refinance their home, before or shortly after the adjustment occurs.
Until this decade, there was a solid rule of thumb: Don’t refinance your loan unless you can save two points on the rate. In that era, you had to save a great deal to make up for the points it cost to get a loan. In fact, for most of this century, all loans typically cost a two-point loan fee.
The good news is that some lenders offer loans with no points. In many cases, you can also get a loan with no points and no closing costs. As you may know, you will get a slightly higher interest rate if you want a no-points, no-cost loan. Of course you always have the option of paying points to get a lower rate. You have several choices:
- No points.
- No points and no closing costs.
- Paying points to get an even lower rate.
The choice is always yours.
If you get a loan with no points and no costs, it may actually make sense to refinance to lower your payment by as little as one quarter of one percent. The goal is to make certain that your new loan saves you money.
When you buy a house, there are up-front costs and mortgage payments to consider. Your buying power depends on how much money you have available to put down on a house and on how much a creditor will agree to lend you.
The general rule of thumb is that you should buy a house that costs up to 2 1/2 times your annual gross income, and your housing costs should be about 1/3 of your take-home pay or 1/4 of your gross pay. This should provide some general parameters for the price range of houses to look at, and an approximate amount you might be able to spend on monthly mortgage payments.
The down payment: Coming up with the cash for a down payment is usually the hardest part of buying a home. If you put down less than 20%, you will be required to purchase Private Mortgage Insurance (This protects the lender’s investment in case you fail to make your payments). The larger your down payment, the lower the cost of your mortgage (and, ultimately, the house). So, you’ll want to make as large a down payment as you can afford. However, before determining your down payment, consider the following costs associated with your loan:
- Closing Costs. These usually total between 3% and 6% of the amount of your loan, and include points, insurance, various fees, and inspections.
- Cash Reserves. Lenders often want to see that you have at least two months of mortgage payments in savings when you apply for your loan.
- Miscellaneous Up-Front Costs. Moving into your new home will cause other up-front costs such as moving costs, repairs that the house might need, furnishing, etc.
Taking all this into consideration, you should try to come up with a down payment of as much as possible. How much can you afford to borrow?
Consider that your lender will review both your income and existing debt to determine how much mortgage debt you can afford. Two ratios serve as guidelines for lenders in evaluating your loan application.
- Housing Expense Ratio: Monthly housing costs (including property taxes and insurance as well as mortgage payments) cannot exceed 28% of your monthly gross income.
- Debt-to-Income Ratio: Your total long-term debt (including housing costs, car loans, student loans, alimony or child support, and balances on credit cards that will take longer than 10 months to pay off) should not exceed 36% of your monthly gross income.
Lenders feel that these guidelines will keep household debt manageable. However, they are somewhat flexible. If you make a large down payment, or if you have consistently made rental payments close to the amount of your proposed mortgage payments, you may be able to exceed these guidelines. And some lenders allow low and moderate-income buyers to use 33% of their gross monthly income for housing and 38% for total debt.
See our Calculators for assistance with helpful calculations. However, just because a formula determines that you can afford a certain mortgage doesn’t mean you will feel comfortable making the payments.
A suggestion would be to keep track of what you spend for a few months and then plan for any vacations you want to take, major purchases you’ll make, or emergency savings you want to have in reserve. This will help you to know what you can comfortably afford.
Private Mortgage Insurance, or PMI, is insurance required by most lenders which is purchased by the borrower to protect the lender in case the borrower defaults on the loan.
If you make a down payment of 20% of the cost of your home, the lender has good reason to trust that you will make your mortgage payments faithfully to protect your large investment. Besides, the lending institution will probably come out ahead if forced to foreclose on your house. This is because the lender loans you 80% of the cost of the house but will recover close to 100% of the cost of the house. But, if you make a smaller down payment, such as 5% or 10%, and borrow the rest, and you default on your loan, the lender risks losing money. So, lenders require you to purchase mortgage insurance, which will guarantee them payment on the balance of loans not covered by the sale of foreclosed properties.
How does it benefit you?
Mortgage insurance dramatically increases your buying power by allowing you to put less money down on a house, so you can buy a home sooner because you don’t have to wait until you can pay 20% up front. Or you can purchase a larger or more desirable home that you could not otherwise afford. Repeat buyers can use a lower down payment to claim more tax-deductible interest while they invest the cash from the sale of their old house or use it to pay other debts or expenses. Of course, a lower down payment does mean that you will pay more in interest in the long run, but mortgage insurance does increase your options.
What are the costs?
An initial premium will be included in your closing costs and a monthly amount in your house payment. The good faith estimate of closing costs, which you will receive after you complete your loan application, includes an estimate of the premium and monthly cost of PMI coverage. The HUD 1 Disclosure Form, which you sign at closing, will give requirements for cancellation. Not all investors allow cancellation, but some will permit the borrower to cancel their mortgage insurance after a year or two of timely mortgage payments which have decreased the risk to the lender.
If you think you might consider canceling your mortgage insurance after a few years, you should find out whether your insurer allows cancellation, what the conditions are, and how much it could save you before closing on your mortgage.