From your first sit down with a lender to finally putting your first offer, below are common questions regarding various loans (and their terminology) that you will come across.
1. When can I remove private mortgage insurance (PMI) from my loan?
A: Your lender will be able to remove private mortgage insurance (PMI) once you have gained 20% equity in your home.
2. What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important?
A: The debt-to-income ratio shows the lender how much you are able to pay towards your mortgage and insurances. Your long-term debt (anything over 6 months) plus your mortgage payments should not exceed 43% of your monthly income. This ensures the lender that you will have enough income to purchase a home and pay for other living expenses.
3. What is the difference between a mortgage interest rate and an APR?
A: Mortgage interest rate is the interest rate on the loan. Annual percentage rate, APR, is all-inclusive rate: mortgage interest rate plus any other charges or fees. This is how the lender gets paid. Instead of paying things out of pocket and upfront, the lender may add a fraction of a percentage point to the mortgage interest rate. The risk of borrower's bad credit and other fix-it costs on the home can be reflected by a higher APR. A good example of the how lenders are able to utilize APR to the borrower's advantage is by increasing APR to finance a new washer and dryer.
4. What is a Qualified Mortgage?
A: Qualified Mortgage (QM) is a federal loan standard that shows the borrower's ability to repay their loan. QM does not allow risky loans such as interest-only, negative amortization, balloon payments, or loans more than 30 years.
5. What is a Good Faith Estimate? What is a GFE?
A: Good Faith Estimate, GFE, is a document that must be provided to the borrower from the lender within 3 days from submitting the loan application. The GFE outlines basic information and terms of the loan so the borrower can make a clear-mind decision on which loan/lender is best for them.
6. What is private mortgage insurance?
A: Private mortgage insurance, PMI, secures the borrower's second lien. A second lien is needed if the borrower does not put at least 20% down payment on their home. During bankruptcy and foreclosure, PMI protects the first-mortgage-lien lender in case the borrower defaults in all, there will be no dispute on which lender has the right to the home.
7. What is an escrow or impound account?
A: An impound account protects the lender from a borrower who may default and not pay for insurance and property taxes. To avoid any issue with the state, the lender sets up a prepaid account to hold up to 6 months worth of property taxes and insurance.
8. Are there any limitations on the upfront charges a bank can charge for a reverse mortgage?
A: Yes there are limits on upfront fees banks can charge for a reverse mortgage on a Home Equity Conversion Mortgage (HECM). Non-FHA backed reverse mortgages, however, may have other charges. The upfront fee depends on the amount taken out the first year and the total authorized amount. For further information, please visit CFPB’s website or ask your local lender.
https://www.consumerfinance.gov/…/are-there-any-limitation…/
9. What are (discount) points and lender credits and how do they work?
A: 1% of the loan amount equals 1 point. Example: 1 point of a $100,000 loan equals to $1,000 dollars. A point is a measurement used to by lenders to supplement low mortgage interest rates.
10. How do I know if a reverse mortgage is a good idea for me? What should I consider before applying?
A: Consumer Financial Protection Bureau (CFPB) provides these 8 questions to consider:
1) Is there another, cheaper way for you to achieve your financial goal?
2) Do you need to tap into your home equity now or should you save it for an emergency?
3) Are you on a fixed income with no other assets?
4) Do you have children or other heirs to whom you plan to leave your home?
5) How long do you and your family plan to live in the home?
6) Does your spouse want to keep living in the house if you die?
7) How much will it cost you in fees to get a reverse mortgage?
8) How will you pay for property taxes, homeowner's insurance, and necessary home repairs?Written by Thomas Ngo
Photo by Glenn Carstens-Peters on Unsplash
