Mortgage Loans, Buying a House: Frequently Asked Questions

 

Earnest money is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. If you back out of a deal, you must forfeit the entire amount.

 

Can I pay off my mortgage loan ahead of schedule?

Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.

 

Are there special mortgages for first-time homebuyers?

Yes. Lenders now offer several affordable mortgage options, which can help first-time homebuyers, overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

 

How large of a down payment do I need?

There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing cost, moving expenses, and possibly--repairs and decorating.

 

In most circumstances,FHA loans require only a three percent down payment.  VA loans (for military veterans) require no down payment.  If your total household income is in the low to moderate range, a conventiona loan known as the Community Home Buyers program, requires only a three percent down payment for those who qualify.

 

What is included in a monthly mortgage payment?

The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance(if applicable).

 

How does the interest rate factor in securing a mortgage loan?

A lower interest rate allows you to borrow more money than a high rate with the same monthly payment. Interest rates can fluctuate as you shop for a loan, so ask lenders if they offer a rate "lock-in" which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR a mortgage loan by expressing it in terms of a yearly interest rate. It is higher than the interest rate because it also includes the cost of points, mortgage and other fees included in the loan.

 

What is an escrow account?

 

An escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable) and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments.

 

What is RESPA?

 

RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose information to potential customers throughout the mortgage process. By doing so, it protects borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing and escrow account practices, and business relationships between closing service providers and other parties to the transaction.

 

What are points?

 

Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/4 (or .25) of a percentage point. As you're shopping for loans, ask us for an interest rate with zero points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible and you may be able to negotiate for the seller to pay for some of them.

 

What is PMI?

 

PMI stands for Private Mortgage Insurance. This insurance is required if you make less than a 20% down payment or have less than 20% equity in your home. It is additional insurance designed to protect lenders from individuals who default on their loans. If you have less than 20% to put down, there are still options for avoiding PMI.   See
Mortgage Insurance.

 

What are closing costs?

 

Closing costs (or settlement costs) are the miscellaneous expenses involved in the transfer of real estate from one owner to another. They are paid when the homebuyer and the seller meet to exchange the necessary papers for the house to be legally transferred.

 

What does a title company do?

 

A title company acts as a neutral third party to handle the legal documents and funds on behalf of a seller and a buyer, or a lender and a borrower.

 

What is an insurance binder? Do I need one for closing?

 

A homeowner's insurance policy for the property must be in force at the time of the closing. An insurance binder is a homeowner insurance company's written commitment to insure title to the property, subject to the conditions and exclusions shown on the binder.

 

Prior to closing, you will need to obtain a Homeowner's Insurance Policy. Your mortgage loan commitment letter will detail exactly how the binder should be worded and what coverage is required. You should try to take care of this as early as possible to ensure a smooth transaction. Please bring the binder and paid receipt to closing evidencing one year of Homeowner's Insurance coverage.

 

What can I expect to happen on closing day?

 

You'll present your paid homeowner's insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc.) and then the money the seller owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proof of any inspection, warranties, etc.

 

Once you're sure you understand all the documentation, you'll sign the mortgage, agreeing that if you don't make payments the lender is entitled to sell your property and apply the sale price against the amount you owe plus expenses. You'll also sign a mortgage note, promising to repay the loan. The seller will give you the title to the house in the form of a signed deed.

 

You'll pay the closing agent all closing costs and, in turn, the closing agent will provide you with a settlement statement of all the items for which you have paid. The deed and mortgage will then be recorded in the state Registry of Deeds, and you will be a homeowner.