1. What will a lender look at when I apply for a mortgage?

Lenders consider many factors in evaluating your loan application, but they usually focus on four areas:

• Income and debt.  How much money you make and what other bills you have to pay helps the lender determine whether you can afford to make mortgage payments.
• Assets.  The lender needs to make sure you have enough money to cover the costs of buying a home.
• Credit.  Whether you’ve met other financial obligations helps the lender predict whether you will repay your mortgage.
• Property.  The home you want to buy has to be worth enough to act as collateral for the mortgage.

2. What does it mean to get pre-approved?

Getting pre-approved means you receive a loan commitment from your mortgage company before you have found a home, based on a review of your credit and finances.  Having your credit pre-approved shows sellers that you’re a qualified buyer and helps you establish a clear price range.  The process is the same as a typical mortgage application, except that your application doesn’t include property information.

3. What if I’ve had credit problems?

Your credit history is only one factor in qualifying for a loan, and having made some late payments doesn’t have to keep you from buying a home.  Someone who has consistently made payments on time in the past may have more financing options than someone who has not, but that doesn’t mean a mortgage is off-limits if you’ve had credit problems. 

4. What is the minimum down payment I can make on a home?

There is generally no minimum down payment required for buying a home.  Many first-time buyers believe they must be able to put down as much as 20% of a home’s purchase price in cash.  That may have been true in the past, but many of the mortgage options available to today’s home-buyers require little or no down payment.  With housing prices as high as they are, homeownership would be impossible for many people if not for these low-down-payment options.

5. Will I have to pay for Private Mortgage Insurance?

Private Mortgage Insurance (PMI) provides your lender with a way to recoup its investment if you are unable to repay your loan.  PMI is usually required when the mortgage amount is higher than 80% of the home’s value.  That means that if you buy a home with a down payment of less than 20%, you will probably have to pay for PMI.

6. What closing costs will I have to pay?

Closing costs vary based on a number of factors — including the lender, mortgage type, purchase contract, and location — but they usually include the following:

• Lender fees.  Your mortgage company may charge for expenses related to making the loan, including an appraisal fee, a credit report fee, origination points, and discount points.
• Third party fees.  Charges for services not provided by your lender often include the settlement fee, title insurance, and attorney’s fees. 
• Prepaid items.  Certain mortgage costs must be paid to your lender in advance. The most common of these are pre-paid interest, hazard insurance, and deposits to set up an escrow account.

7. Should I pay discount points?

Discount points are prepaid interest, which you can pay to your lender at closing in exchange for a lower interest rate on your mortgage.  Paying discount points, each of which is equal to 1% of the loan amount, is often called “buying down” your rate. 

So does paying points make sense for you?  The answer depends primarily on how long you plan to stay in your home.  First, find out how much lower your monthly payments will be if you pay points.  Then, calculate how long it will take for those monthly savings to add up to the cost of the points.  If it would take five years to break even and you’re planning to live in your home for 10, paying discount points may be a smart move.

8. Should I choose a fixed-rate or adjustable-rate loan?

Most mortgage loans have either a fixed interest rate or an adjustable interest rate.  With a fixed-rate mortgage, the interest rate never changes and your payments remain stable throughout the life of your loan.  With an adjustable-rate mortgage (ARM), the interest rate changes at regular intervals — usually once every year — based on a formula that uses a market index.  For most ARM options, rate adjustments begin after an initial period — usually between three months and ten years — during which the rate is fixed.

A fixed rate is usually recommended if you plan to stay in your home for the long term and are buying at a time when rates are relatively low.  An ARM is usually recommended if you plan to move before the rate adjustments begin, or if you are buying when rates are relatively high. 

For help deciding which option is right for you, try our Fixed vs. Adjustable Rate Calculator.

9. Should I lock my rate?

Locking your interest rate means your lender guarantees the rate on your loan even if market rates change before closing.  Most lenders will allow you to lock your rate for 30 to 60 days, with the option to extend the rate-lock period for a fee.  So how do you know whether to lock your interest rate?  It depends on whether you expect rates to rise or fall before you close on your home.  No one knows for sure which direction rates will go at a given time, so it’s difficult to make a reliable prediction.  It helps to keep track of announcements from the Federal Reserve Board, whose monetary policies have an effect on mortgage rates, and to talk to you financial advisor about what may happen in the near term.

10. What will my mortgage payments include?

For most borrowers, each monthly mortgage payment goes toward the following:

• Principal, which is the total outstanding balance of the loan
• Interest, which is the cost of borrowing money
• Taxes, which are levied on the property by the local government
• Insurance, which protects the owner and the lender from losses caused by fire and natural hazards

To find out how much your monthly payments may be, use our Monthly Payment Calculator.

Seller Subsidy (Seller  concession) - How Much Is Too Much?

It is common for real estate professionals, mortgage loan officers, buyers and sellers to ask as to how much the seller is allowed to pay in contributions on a conventional mortgage loan in Virginia. Closing costs that are normally paid by the borrower are considered contributions if they are not paid by other parties. The seller, builder, developer, real estate agent or any other interested party to the transaction, may pay these contributions.

The maximum allowable contributions from interested parties are based upon the lesser of the purchase price or appraised value, property type and the down payment amount.

Primary residences and second homes with less than 10% down allow contributions of 3%.  The maximum contribution is 6% for conforming 80/20 and 90/10 on primary residence and second home financing.

Investment property is limited to 2% concessions regardless of down payment.

Contributions toward any of the following are included in the maximum allowable limits:

1. Normal Closing Costs

2. Discount points

3. Commitment fees

4. Origination Fees

5. Mortgage Insurance Premium

6. Discount Points for temporarily or permanently lowering the borrowers monthly payment or interest rate.

7. Any other transfer fees normally paid by the borrower, e.g., transfer taxes, tax stamps, title insurance, surveys, appraisal, and recording and attorney fees.

8. Homeowner association fees for future dues.

If there are excess contributions, a downward adjustment to the property's sales price must be made to reflect the amount of any contributions that exceed the maximum contribution limits. The LTV/TLTV ratio must then be calculated based upon the lesser of the reduced sales price or the appraised value.

The value of any personal property, e.g., furniture, decorator items, automobiles or other "giveaways", must also be deducted from the property's sales price regardless of the amount of any other contributions.

 

A cash credit, cash rebate, incentive or inducement/enticement to purchase from the seller, builder, or developer must also be subtracted from the property's sales price. Examples may include but are not limited to: excessive marketing costs, commissions, or seller financing at below market interest rates.

A new LTV/TLTV must be calculated whenever the property's sales price is reduced. The LTV/TLTV is based on the lesser of the adjusted sales price or the appraised value.

Usually, a small list of personal property may come with a house. Most built-in appliances (such as stove, refrigerator, dishwasher), window coverings and carpeting, are usually considered to be fixtures so no adjustment to the purchase price is needed.

You see how important it is that Loan Officers and Real Estate Agents understand the limits of concessions. A lack of training on our part can cause major frustration for the buyer and seller. Sales contracts and mortgage loans should be structured correctly.