Our Most Frequently Asked Questions.
With our extensive mortgage expertise, we get asked a lot of questions. Below are some of our most frequently asked questions about mortgages(1) and related topics. Simply click on the question to see the answer.
Why would I want to own a home instead of renting?
Owning a home has many benefits:
- Your monthly house payment could be the same as or less than the rent you’re paying.
- Eventually, you will own the house and no longer have to make payments.
- Buying a home may help you avoid the ups and downs of the rental market.
- You could enjoy income tax benefits (consult your tax advisor for eligibility).
- How do I know what I can afford?
What does it mean to lock in an interest rate?
Interest rates can often fluctuate without advance notice, depending on the market. Locking in a rate protects you from the time that your lock is confirmed to the day that your lock period expires.
A lock is an agreement by the borrower and the lender and specifies the number of days for which a loan's interest rate and points are guaranteed. Should interest rates rise during that period, your lender is obligated to honor the committed rate. Should interest rates fall during that period, the borrower must honor the lock.
What is a mortgage, exactly?
This document pledges a property to the lender as security for repayment of a debt. Essentially, this means you'll give your property up to the lender in the event you cannot make the mortgage payments.
What are the advantages and disadvantages of a 15-year mortgage?
A 15-year fixed-rate mortgage offers several big advantages for most borrowers:
- You own your home in half the time it would take with a traditional 30-year mortgage.
- You save more than half the amount of interest of a 30-year mortgage.
- Lenders usually offer the 15-year mortgage at a slightly lower interest rate than with 30-year loans.
It is this lower interest rate added to the shorter loan life that creates real savings for 15-year fixed-rate borrowers.
Possible disadvantages associated with a 15-year fixed rate mortgage are:
- The monthly payments for this type of loan are roughly 10%-15% higher per month than the payment for a 30-year mortgage.
- Because you'll pay less total interest on the 15-year fixed-rate mortgage, you may not have the maximum mortgage interest tax deduction possible (consult your tax advisor for eligibility).
Please consult with your tax advisor on eligibility.
Should I pay points?
Points are considered a form of interest. Each point is equal to one percent of the loan amount. You pay them up-front at your loan closing in exchange for a lower interest rate over the life of your loan. This means more money will be required at closing; however, you will have lower monthly payments over the term of your loan.
To determine whether it makes sense for you to pay points, you should compare the cost of the points to the monthly payment savings created by the lower interest rate. Divide the total cost of the points by the savings in each monthly payment.
This calculation provides the number of payments you'll make before you actually begin to save money by paying points. If the number of months it will take to recoup the points is longer than you plan on having this mortgage, you should consider the loan program option that doesn't require points to be paid.
What is an appraisal and why is it necessary?
The lender needs to know if the value of your home is enough to secure the loan. To get this information, the lender typically hires an independent appraiser who gives an appraisal report about the value of your home.
An appraisal report is a written description and estimate of the value of the property. National standards govern not only the format for the appraisal, but also the appraiser's qualifications and credentials. In addition, most states now have licensing requirements for appraisers evaluating properties located within their states.
The appraiser will provide a written report for us and you'll be given a free copy prior to loan closing.
What is private mortgage insurance?
Private mortgage insurance protects the lender against default and enables the lender to make a loan which the lender considers a higher risk. Lenders often require mortgage insurance for loans where the down payment is less than 20% of the sale price.
You may be billed monthly, annually, by an initial lump sum, or some combination of these practices for your mortgage insurance premium.
What is title insurance and why do I need it?
The function of a title insurance company is to make sure your rights and interests to the property are clear, that transfer of title takes place efficiently and correctly, and that your interests as a homebuyer are fully protected.
Title insurance companies provide services to buyers, sellers, real estate developers, builders, mortgage lenders, and others who have an interest in real estate transfer.
Title companies typically issue two types of title policies:
- Owner's Policy: This policy covers you, the homebuyer.
- Lender's Policy: This policy covers the lending institution over the life of the loan.
Both types of policies are issued at the time of closing for a one-time premium, if the loan is a purchase. If you are refinancing your home, you probably already have an owner's policy that was issued when you purchased the property, so we'll only require that a lender's policy be issued.
Buying a home is a big step emotionally and financially. With title insurance, you are assured that any valid claim against your property will be borne by the title company, and that the odds of a claim being filed are slim to none.
What is flood insurance and why do I need it?
Most lenders will not lend you money to buy a home in a flood hazard area unless you pay for flood insurance. Some government loan programs will not even allow you to purchase a home that is located in a flood hazard area.
You should be notified if flood insurance is required. If a change in flood insurance maps brings your home within a flood hazard area after your loan is made, your lender may require you to buy flood insurance at that time.
What happens at closing?
The closing will usually take place at the office of a title company. If you are purchasing a new home, the seller may also be at the closing to transfer ownership to you. During the closing, you will be reviewing and signing several loan papers.
A few of the most important documents you will be signing include a mortgage, note, HUD-1 Settlement Statement, and a Truth-in-Lending Statement. All 4 of these documents are further described below.
What is a note?
This is the document you sign to agree to repay your mortgage. The note will provide you with all of the details of your loan, including the interest rate and length of time to repay the loan. It also explains the penalties that you may incur if you fall behind in making your payments.
What is a HUD-1 Settlement Statement?
This document provides an itemized listing of the final fees charged in connection with your loan. If your loan is a purchase, the settlement statement will also include a listing of any fees related to the transaction between you and the seller. If this loan will be a refinance, the settlement statement will show the pay-off amounts of any mortgages that will be paid in full with your new loan.
Most items on the statement are numbered according to a standardized system used by all lenders. These numbers will correspond to the numbers listed on the Good Faith Estimate. This document is also commonly known as the closing statement and both the buyer and seller must sign this document.
What is a Truth-in-Lending Statement?
This document provides full written disclosure of the terms and conditions of a mortgage, including the annual percentage rate (APR) and other fees. It is exactly the same as the TIL that you received immediately after your initial application, except it has been updated to reflect the final rate, fee information and possible other items such as term of the loan, etc. Federal law requires that all lenders provide you with this document at closing.
Will the bank need to verify my assets for me to get my loan?
If there is anything due at your closing, you’ll need to prove that you have those funds in an account. If your loan has mortgage insurance or if you own investment properties, you are also required to show a certain amount of money in “reserves”—basically, money in the bank that you can access in case of emergency.
I am getting a gift from my parents for my down payment. What do you need to show this?
First off, a big hug is in order. Second, your parents will need to provide a signed “Gift Letter” (your loan officer can give you one of these).
You will also need to show three important things: availability, transfer, and receipt:
- Availability: A signed letter from your parents’ bank stating the account noted on the gift letter had sufficient funds to cover the amount of the gift.
- Transfer: A cashier’s check, drawn from your parents’ account, with your parents as remitters, with their account number (must match account number on the gift letter) noted on the check. Make a copy of the check before you deposit it.
- Receipt: Provide a copy of the deposit ticket and a printout from your bank showing the money made it into your account.
This is how I get paid—what do I need to know?
- Salary – Pretty straight forward: W2s and pay stubs will be reviewed for consistency.
- Hourly Wage – Be sure to tell your mortgage banker how many hours you average. Also communicate if you have a goofy schedule or shift differential.
- Bonus – Bonus income must be averaged over two years. If it appears to be declining, the most recent year will be used.
- Commission – Commission income must be averaged over two years. If it appears to be declining, the most recent year will be used. Also, if you write off unreimbursed business expenses on your tax returns, that amount must also be subtracted from your earnings.
- Overtime – Overtime income must be averaged over two years. If it appears to be declining, the most recent year will be used.
- Tips – You can count what you claim on your tax returns.
- Rental real estate – You’ll need to show that you have a history of receiving rental income in order to count it. Underwriters will typically look at your last two tax returns. If you purchased a rental property since your last tax return was filed, plan on also providing a signed lease agreement.
- Farm income – Underwriters will use the Schedule F from your tax returns to calculate farm income or loss. You will also probably be asked where the farming activities occur, as you typically can’t get a residential mortgage on an income-producing property.
- Self-employed, sole proprietor – A two-year average of your bottom line tax return income (after deductions, etc.) will be used for qualifying for your loan. Your CPA will need to write a brief letter that states you are still, to the best of their knowledge, receiving self-employed income. Also, you may need to provide a business license and third-party references.
- Self-employed, owner of a partnership, LLC or LLP – If the business files corporate tax returns, see the paragraph below this one. If the business does not file corporate tax returns, see the paragraph above this one.
- Self-employed, owner of a corporation – You need to provide corporate tax returns for any business in which you have a 25% or greater ownership stake. If you own less than 25%, be prepared to provide K1s to prove it.
- Social Security – A Social Security award letter is needed.
- Pension – Plan to prove the amount of your pension distribution and prove it will continue for at least three years.
- IRA/401(k) Distribution – Plan to prove the amount of your IRA/401(k) distribution and prove it will continue for at least three years.
- Interest/dividend – You’ll need to provide 2 years of tax returns to show a history of receiving this income, and you’ll also need to provide proof that the asset is sizable enough to continue
- Disability – A disability award letter is needed to prove the monthly benefit.
- Child support – First, you don’t need to disclose child support income if you don’t want to. To use child support income, you will need to prove how much your child support is, how consistently you receive it, and when it is set to expire. Expect to provide a divorce decree or child support order, a printout from Social Services showing payment history or six months of bank statements showing receipt, and birth certificates of your children to show their ages.
- Clergy – Since clergy typically straddle the line between employee and self-employed, we will often request a verification on employment from the church. The verification of employment will give the underwriter some direction on what will be needed to back up the income. Expect us to ask for more documents from you while your loan is mid-stream.
- Union Workers – You’ll need to provide all of your W2s and document every job for the previous 2 years.
Do I need to provide the terms under which funds can be withdrawn from my retirement account?
If you are using money saved in a retirement account as proof of your assets, we need to know whether you can get at that money. Typically, you can contact the investment manager for the account and ask them to forward you a print-out of the terms for withdrawal.
401(k) account? Talk to Human Resources. If you do intend to withdraw funds from a retirement account, be sure to consult a tax professional. The penalties and taxes can be hefty.
My job was set up through a temporary staffing agency. Is that OK?
We’re sorry, but no. You will need to establish permanent employment in order for it to be considered a stable source of income.