The following are some additional sites that may be helpful in the buying process:

HUD - First Time Home Buyers Tips

Home Buyer's Information Center

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Mortgage Tips

During the home buying process, most people will need to obtain a mortgage on their property. Maida Services has provided the information on this page as a summary of loan types and their differences. The information provided on this page is not for decision-making nor intended to be construed as a substitute for obtaining proper expert advice from recognized mortgage professionals and your attorney.

Common Loan Types: Conventional, FHA, VA and "No-Document"

Conventional: A "traditional" mortgage, not directly insured by the Federal Government. Conventional loans are administered through Fannie Mae or Freddie Mac (private corporations but regulated by the government).

FHA: Insured by (but not funded by) the Federal Housing Administration (FHA) a division of the U.S. Department of Housing and Urban Development (HUD), and designed for, in general, low- and middle-income borrowers and many first-time buyers. There are, however, limits (which vary from county to county) to the maximum loan amount. FHA loans may have somewhat more relaxed qualifying standards and ratios than conventional.

VA: For those qualified by military service, the Veterans Administration (VA) insures (but does not fund) 15 and 30 year fixed as well as 1 year adjustable mortgages. May have lower down payment requirements (as low as 0 down) and somewhat more lenient qualifying ratios.

No-Document ("No-doc) Loans: No-doc mortgages are generally a wise choice for self-employed people, those who do not wish to verify their income, and those with a brief or blemished credit history, or no credit. The benefits of a no-doc mortgage include a shorter application process since you are not required to provide income, employment or asset documentation, as well as a streamlined approval process because there is little subsequent verification. However, no doc mortgages generally will be at slightly higher interest rates and are offered by fewer lenders.

FIXED RATE MORTGAGES:
A fixed rate mortgage is a mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable. Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "biweekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)

Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan. For example, a 15-year fixed rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher.

ADJUSTABLE RATE MORTAGES (ARM):
An adjustable rate mortgage may get you started with a lower monthly payment than a fixed rate mortgage, but your payments could get higher when the interest rate changes.

Advantages and Disadvantages of Fixed and ARM Mortgages

Advantages - Fixed

Advantages - ARM

  • No possibility of an interest rate change making your mortgage payment suddenly unaffordable.
  • No anxiety over interest rate fluctuations.
  • Lower initial interest rate and therefore lower monthly payment.
  • If interest rates decline, so will your payment.
  • Easier to qualify for; due to lower initial interest rate and payment amount.

Disadvantages - Fixed

Disadvantages - ARM

  • If interest rates decrease, it will be necessary to refinance to get a lower payment.
  • If interest rates increase, your payment will also increase.
  • A large increase in interest rates - and your payment - could make your house unaffordable.

 

Rates: Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.

Points: Points are fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate. Ask for points to be quoted to you as a dollar amount--rather than just as the number of points--so that you will actually know how much you will have to pay.

Fees: A home loan often involves many fees, such as loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs. Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable. Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. "No cost" loans are sometimes available, but they usually involve higher rates.

Down Payments and Private Mortgage Insurance

One of the most frequently misunderstood aspects of mortgaging a home, especially for first-time buyers, is Private Mortgage Insurance (PMI). The most common misconception is that PMI is a mortgage life insurance policy whereby the mortgage would be paid off should the borrower die. It is not. Instead, PMI is an insurance that most lenders require of all borrowers who put less than 20% down. It's purpose is to protect the lender against losses should the borrower default.

Virtually all conventional mortgages with less than a 20% down payment will dictate the inclusion of PMI. FHA mortgages, which are insured by the Federal Government, require a different type of insurance with different coverages. The cost of PMI will depend on a number of factors, including the insurance carrier and the size of the loan. When confronted with PMI for the first time, many buyers will ask "If I'm paying the premium but it is the lender who is protected, what's in it for me?" Simply, the ability to purchase a home with less than 20% down. Lenders have found that those who put down less than 20% are far more likely to default than those who put down more. With the protection of PMI, lenders are able to make more loans (and more buyers are able to buy homes) with down payments as low as 5% or 10%. This is especially important to first-time buyers, where liquid cash for down payments and closing costs is often tight.

Unlike the mortgage insurance on FHA loans (which remains through the life of the loan) PMI is, under certain circumstances, cancellable. A new law, the Homeowners Protection Act of 1998, simplified this cancellation process greatly. Where once it was an involved process to get the PMI removed from the loan, the procedure is now much more "owner-friendly". With all qualifying loans that originated after July 29, 1999, a homeowner has the right to request cancellation when the mortgage balance is less than 80% of the original purchase price or appraised value (whichever is less). In order to request cancellation, the loan must be current with no delinquencies in the last 1-2 years. In addition, an appraisal of current value (at the homeowner's cost) may be required.

The Homeowners Protection Act also stipulates (in the case of most loans) that when the balance reaches 78%, cancellation is automatic. Again, the loan must be current for the cancellation process to begin. Obviously, your first goal should be a 20% down payment level since this achieves a number of goals. First, it eliminates the cost of PMI entirely. Second, it lowers your monthly payment (since you have financed less). Third, it allows you to buy more house since the money that would have been for PMI can now be for a higher mortgage payment.

More on Private Mortgage Insurance (PMI)

Some lenders require 20 percent of the home's purchase price as a down payment. However, many lenders now offer loans that require less than 20 percent down--sometimes as little as 5 percent on conventional loans. If a 20 percent down payment is not made, lenders usually require the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. When government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services are available, the down payment requirements may be substantially smaller.

If PMI is required for your loan:

FAIR LENDING IS REQUIRED BY LAW:

The Homeowners Protection Act also stipulates (in the case of most loans) that when the balance reaches 78%, cancellation is automatic. Again, the loan must be current for the cancellation process to begin. Obviously, your first goal should be a 20% down payment level since this achieves a number of goals. First, it eliminates the cost of PMI entirely. Second, it lowers your monthly payment (since you have financed less). Third, it allows you to buy more house since the money that would have been for PMI can now be for a higher mortgage payment.

CREDIT PROBLEMS?

Don't assume that minor credit problems or difficulties from unique circumstances, such as illness or temporary loss of income, will limit your loan choices to only high-cost lenders. If your credit report contains negative information that is accurate, but there are good reasons for trusting you to repay a loan, be sure to explain your situation to the lender or broker. If your credit problems cannot be explained, you will probably have to pay more than borrowers who have good credit histories. But don't assume that the only way to get credit is to pay a high price. Ask how your past credit history affects the price of your loan and what you would need to do to get a better price. Take the time to shop around and negotiate the best deal that you can.

Annual percentage rate (APR) is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay.

Whether you have credit problems or not, it's a good idea to review your credit report for accuracy and completeness before you apply for a loan. To order a copy of your credit report, contact:

Equifax: (800) 685-1111
TransUnion: (800) 888-4213
Experian: (888) 397-3742

GLOSSARY

Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.

Annual percentage rate (APR) is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay.

Conventional loans are mortgage loans other than those insured or guaranteed by a government agency such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development Services (formerly known as Farmers Home Administration, or FHA).

Escrow is the holding of money or documents by a neutral third party prior to closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.

Fixed-rate loans generally have repayment terms of 15, 20, or 30 years. Both the interest rate and the monthly payments (for principal and interest) stay the same during the life of the loan.

The interest rate is the cost of borrowing money expressed as a percentage rate. Interest rates can change because of market conditions.

Loan origination fees are fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.

Lock-in refers to a written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing.

A mortgage is a document signed by a borrower when a home loan is made that gives the lender a right to take possession of the property if the borrower fails to pay off the loan.

Able-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.

Points are fees paid to the lender for the loan. One point equals 1 percent of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs.

Private mortgage insurance protects the lender against a loss if a borrower defaults on the loan. It is usually required for loans in which the down payment is less than 20 percent of the sales price or, in a refinancing, when the amount financed is greater than 80 percent of the appraised value.

Thrift institution is a general term for savings banks and savings and loan associations.

Transaction, settlement, or closing costs may include application fees; title examination, abstract of title, title insurance, and
property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys' fees; recording fees; and notary, appraisal, and credit report fees. Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three days of application. The good faith estimate lists each expected cost either as an amount or a range.

The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex,
handicap, familial status, or national origin. Under these laws, a consumer cannot be refused a loan based on these characteristics nor be charged more for a loan or offered less favorable terms based on such characteristics

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