Mortgage Center

Obtaining a mortgage can be challenging.  The information provided here will help you plan and prepare for the process.  Feel free to call us with any questions you might have.  Here you will find a Mortgage Calculator to see what a mortgage might cost, and helpful articles from Zillow, such Can you afford a mortgage?, Is a Reverse Mortgage for you?, How do I qualify for a loan?, What do all these terms mean?, Should I Consider a Home Equity LoanWhat are Closing Costs?, What is an FHA Loan?.   

As always, feel free to call us 704-548-1000 or send us an email for a no hassle, no obligation consultation.  





Can Your Afford a Mortgage?

Whether you're a first-time buyer looking for the perfect starter house, or a seasoned pro trading up to your waterfront dream home, you are probably asking the same questions: Can I afford this? And is this the right move at the right time?

Of course, you can use a mortgage calculator and ask the experts; lenders, agents, and mom, but the reality is that you are the only one who truly knows whether you can afford to buy right now. And, painful as it is, what you need to start with is a detailed expense breakdown. Analyze what you spend, at least get a full month's snapshot. You'll see where you may have wiggle room in your budget and what you can afford for housing. (Be sure to count all those little incidental expenses like dry cleaning and yes, those mid-afternoon Starbucks lattes count in the budget, too!)

Sample Budget

This sample budget belongs to a single, 35-year-old woman making $68,000 per year, renting a two-bedroom apartment. Her monthly pre-tax income is $5,667.

Monthly expenses:

Rent $1,600
Car payment $225
Credit card payments $200
Car insurance $75
Groceries $400
Health insurance/renters insurance $208
Electricity $40
Natural gas $70
Cell phone $49
Home phone + Internet access $72
Cable TV $50
Gas, dining, clothes, dry cleaning, gifts, other expenses $800
Memberships (gym, professional, etc.) $100
Water/sewer/garbage $0
Property tax/homeowners insurance/condo fees $0
Alarm company $0
Lawn $0
Total $3,889

The sample budget may not look like your expense snapshot, but by adding and subtracting your personal budget items with an eye toward true monthly out-of-pocket totals, you get a pretty good picture. Now, add in all of the expenses where the zeros are as well as the increased cost of your monthly mortgage payment (formerly rent). Maintenance costs like condo fees, utilities, the leaky bathroom sink that defies a simple trip to Home Depot to fix, property taxes, closing costs, and furniture for your new home all add to the bottom line.

Debt-to-Income Ratios

If you figure out that you can afford your projected budget, chances are you'll qualify for a mortgage in your range. Lenders will determine how much loan you can afford by using something called your debt-to-income ratio, which is the ratio of a borrower's total debt as a percentage of their total gross income. Basically, they will look at what's left in your budget after your monthly bills are paid. These include credit card payments, car payments, child support, etc.

  • Housing ratio (or "front-end ratio"): Lenders want your total mortgage debt (called PITI, an acronym for Principal, Interest, Taxes, and Insurance) and condo fees to be no more than 30 percent of your gross monthly income; 28 percent is standard.
  • Overall debt ratio (or "back-end ratio"): These are revolving monthly payments, such as credit card, car lease, or loan payments, student loans, child support, alimony, monthly utilities. (They do not include those lattes, but you might want to plug in your lifestyle expenses for your own sake.) The ratio should not be more than 36 percent.

Debt-to-income ratio standards differ from lender to lender, and vary based on your loan program, but most lenders will give more weight to your credit history as a factor in determining your particular situation. Here is a typical ratio for a first-time buyer:

Monthly gross household income:
Mortgage debt ratio:
28% $1,596.0
Expenses and overall debt:
36% $2,052.0

The mortgage debt of $1,596 is right in line with the current monthly rent payment in the example above. As long as the monthly debt obligations and household expenses are no higher than $2,000-2,300, this borrower should have no problem qualifying.

If your credit is stellar, you will be rewarded. Lenders may stretch these ratios to 38/45, allowing you to purchase more home and take advantage of more lending programs. And if you are a first-time home-buyer applying for an FHA or VA loan, you may also be able to qualify with a higher back-end ratio up to 41 percent of your monthly gross income and get approved for these federally-insured loans.

How It Works

So, back to the question: How much home can I afford?

Keeping in mind the variables on debt-to-income ratios and the many lending programs available, here is a sample breakdown for a mid-range home.

Monthly gross household income (pre-tax): $7,000  
Mortgage debt ratio 28% $1,960
Home price $350,000  
20% down payment $70,000  
Mortgage $280,000  
Interest rate on 30-year mortgage 6.33%  
Mortgage payment (principle and interest) $1,739  

Here is an example of a lower price-range home, purchased with the same loan terms and interest rate:

Monthly gross household income (pre-tax): $3,600  
Mortgage debt ratio 28% $1,008
Home price $150,000  
Mortgage payment (principle and interest) $1,739  
10% down payment $15,000  
Mortgage $135,000  
Interest rate on 30-year mortgage 6.33%  
Mortgage payment (P&I) $838  

And the Other Costs...

In addition to the monthly mortgage payment, remember to factor in the added costs of home purchase and ownership. Since this buyer above did not put 20 percent down, he will need to add mortgage insurance, also known as PMI, to his monthly payment. PMI protects lenders against losses that can occur when a borrower defaults on a loan, and is required for borrowers with a down payment of less than 20 percent of the purchase price. Buyers also incur closing costs of 2.5 to 3 percent of the total loan amount. This covers the cost of title searches, appraisals, legal fees, etc.

So what's left to apply to the down payment? Using the example above, our first-time buyer has $15,000 for the down payment on a $150,000 home, and the closing costs may come to $4,500. The mortgage total just increased to $139,500. Over the 30-year loan period, this brings the mortgage payment to approximately $866 per month. If your head is not already spinning, now tack on mortgage insurance (fees vary based on the loan), homeowners' taxes and condo fees (if applicable), bringing the total monthly payment to approximately $1,038. The good news is this is still well in the range of the acceptable debt ratio.

Keep Some Money in Reserve

Many buyers invest every red cent they have into their new purchase, but it's a good idea to keep some emergency cash, or "leaky faucet money," aside in the event of emergency repairs or a job loss. So don't completely raid your savings; with home ownership, expect the unexpected.

© Zillow, Inc. 2009. Originally posted - Can You Afford a Mortgage?








Reverse Mortgages, Home Equity Loans

Here's the scenario: You have lived in your home for many years and it is worth more now than it was when you bought it. You are finally retiring, but you'd like to be able to eat more than dog food and that isn't looking likely. So you borrow against your equity, which is the amount you have invested in your home less the amount you owe on it, and pay your bills out of the new loan while you continue to live in your house.

Many Americans are opting for this type of mortgage so they can stay in their homes in their retirement years.

How it Works

Think of it as the opposite or reverse of more traditional loans: With other types of mortgages, the equity in your home increases as you make monthly payments, and your debt decreases. But with reverse mortgages, a lender gives you cash and the payments are basically taken out of the value of your home. As the debt increases, the equity in your home decreases. When the loan term is up, the borrower has to pay back the loan, plus interest (usually by selling the house).

The loan is limited by the value of the house; a homeowner cannot borrow more than the house is worth, and a lender can never try to get money to cover the loan anywhere other than from the home equity.

Borrowers generally wish to receive the payments monthly, or in a lump sum and then a line of credit for further payments.

Who Is it for?

Homeowners 62 or older are the only ones eligible for a reverse mortgage. Since the loan is based on equity in a home, and since there are no monthly payments to make, the homeowner does not need to have an income to qualify. However, the borrower still has to pay home maintenance, taxes, and insurance costs. Most lenders will not lend on mobile homes or apartment co-ops.

This is one time when age can be an advantage: The older a borrower is, the higher the amount they can most likely borrow.

Types of Reverse Mortgages

While reverse mortgages can vary, the most popular is a Home Equity Conversion Mortgage (HECM) which is backed by the federal government. Many lenders have software that allows you to compare a HECM with a loan from a private lender.

  • A Home Equity Conversion Mortgage is the only reverse mortgage program backed by the federal government via the Federal Housing Administration, which limits loan costs and oversees the lender. Because the loan is insured, the borrower is guaranteed to receive the amount promised regardless of whether the lender defaults, or the home decreases in value. These loans are flexible in terms of what you can spend the money on and the amount you can borrow, but they can be expensive. They are by far the most popular reverse mortgages.
  • Low-income reverse mortgages are available through state and local governments, but only for specific purposes. Note that all loans are not necessarily available in all locations.
    • Deferred Payment Loans (DPL) are low in cost, but limited in scope. For low-income borrowers, they are to be used specifically for repairing your home.
    • Property Tax Deferral loans (PTDL) are to be used only to pay property taxes. As with all reverse mortgages, you don't have to repay the loan as long as you stay in the house.
  • A Proprietary Reverse Mortgage from a private lender can often get you more money, but is the most expensive loan. It is generally used by homeowners in a very high-value home. The most common is the Fannie Mae Home Keeper Mortgage.

Rates and Fees

With a traditional mortgage, it's easy to itemize the costs in terms of interest rate and service fees. But with reverse mortgages, the cost is dependent on such things as what happens to the value of the house during the term of the loan, and the cash advances received. To give borrowers some idea, lenders are required to disclose the Total Annual Loan Cost (TALC) which does not answer the question definitively, but helps. Borrowers can use the TALC from different lenders to compare mortgages.

One thing stays true: Start-up costs are high, so the longer you stay in the home, the less expensive the loan. You can choose monthly or yearly interest rates, each tied to the Fed Treasury Bill. The best way to estimate the cost is to enter your specific information into a Reverse Mortgage calculator.

In general, fees include:

  • Origination fee: A fee charged by a lender that is 2% of the home's value, or 2% of a county's limit placed on the value of a house specifically for determining a reverse mortgage amount. The amount is negotiable.
  • Closing costs: Service fees covering appraisal, surveys, title search, etc. Varies by the value of the house.
  • Mortgage Insurance Premium: Guarantees your loan and costs 2% of the value of your home, or of a county's limit placed on the value of a home, and 0.5% added to the interest rate as the loan increases. This can be high.
  • Servicing fee: Administrative fee to the lender, about $35 a month, negotiable.
  • Interest rate: Usually adjustable, based on the 1-year Treasury rate, plus a margin. Capped at 2% per year, or 5% over the life of the loan.

Borrower Beware

Reverse Mortgages are complex and hard to understand, therefore may include hidden fees and high overall costs. The AARP site has an entire section devoted to explaining these loans.

Borrowers need to be especially careful on Reverse Mortgages' downside:

  • Cheaper, uninsured reverse mortgages mean the balance is due at the end of the term and the homeowner may have to sell the house to pay off the loan.
  • They are expensive; the loan can end up costing the homeowner more than he borrowed.
  • A borrower cannot predict the true cost because it is based on how long they live or stay in the house.
  • The mortgage could affect government benefits for low-income borrowers.
  • They can invite scams aimed at seniors, including "estate planning" fees.

Where to Get One?

Lenders specializing in reverse mortgages are generally members of the National Reverse Mortgage Lenders Association (NRMLA). (Note: Zillow Mortgage Marketplace does not target Reverse Mortgages as part of its product offering.)

© Zillow, Inc. 2009. Originally posted - Is Reverse Mortgage For You?







Qualifying For a Mortgage, Mortgage Rates, Down Payment

A basic truth: A loan holds your house and land as collateral; it's not a pound of flesh, but the loss can seem just as life-threatening.

In most cases, a lender does not really want to end up with your house. They want you to succeed and make those monthly payments that make the world (or at least the U.S. world) go 'round. So when you apply for a loan, the lender will scrutinize your financial situation to make sure you are worth the risk.

You need to get your paperwork in order before you find a lender, but first you should understand the basic facts.

  • Down payment. Traditionally, lenders like a down payment that is 20 percent of the value of the home. However, there are many types of mortgages that require less. Beware, though: If you are putting less down, your lender will scrutinize you even more. Why? Because the less you have invested in the home, the less you have to lose by just walking away from the loan. If you cannot put 20 percent down, your lender will require private mortgage insurance (PMI) to protect himself from losses. (However, if you can only afford, for example, 5 percent down, but have good credit, you can still get a loan, and even avoid paying PMI. Ask your lender about an 80/15/5 loan or an 80 percent first mortgage, followed by a 15 percent second mortgage, and 5 percent down. This gives the lender more security, while saving you the cost of insurance.)
  • LTV. Lenders look at the Loan to Value (LTV) when underwriting the loan. Divide your loan amount by the home's appraised value to come up with the LTV. For example, if your loan is $70,000, and the home you are buying is appraised at $100,000, your LTV is 70%. The 30 percent down payment makes that a fairly low LTV. But even if your LTV is 95 percent you can still get a loan, most likely for a higher interest rate.
  • Debt ratios. There are two debt-to-income ratios that you need to consider. First, look at your housing ratio (sometimes called the "front-end ratio"); this is your anticipated monthly house payment plus other costs of home ownership (e.g., condo fees, etc.). Divide that amount by your gross monthly income. That gives you one part of what you need. The other is the debt ratio (or "back-end ratio"). Take all your monthly installment or revolving debt (e.g., credit cards, student loans, alimony, child support) in addition to your housing expenses. Divide that by your gross income as well. Now you have your debt ratios: Generally, it should be no more than 28 percent of your gross monthly income for the front ratio, and 36 percent for the back, but the guidelines vary widely. A high income borrower might be able to have ratios closer to 40 percent and 50 percent.
  • Credit report. A lender will run a credit report on you; this record of your credit history will result in a score. Your lender will probably look at three credit scoring models (one for home equity loans or lines of credit) and then average them to arrive at your score. The higher the score, the better the chance the borrower will pay off the loan. What's a good score? Well, FICO (acronym for Fair Isaac Corporation, the company that invented the model) is usually the standard; scores range from 350-850. FICO's median score is 723, and 680 and over is generally the minimum score for getting "A" credit loans. Lenders treat the scores in different ways, but in general the higher the score, the better interest rate you'll be offered.
  • Automated Underwriting System. The days when a lender would sit down with you to go over your loan are over. Today you can find out if you qualify for a loan quickly via an automated underwriting system, a software program that looks at things like your credit score and debt ratios. Most lenders use an AUS to pre-approve a borrower. You still need to provide some information, but the system takes your word for most of it. Later on, you'll have to provide more proof that what you gave the AUS is correct.
© Zillow, Inc. 2009. Originally posted - Qualifying for a Mortgage





Mortgage Glossary

Adjustable Rate Mortgage (ARM): A mortgage loan with payments usually lower than a fixed rate initially, but is subject to changes in interest rates. There are a variety of ARMs that can have an initial interest rate that lasts three to 10 years, adjusting annually thereafter. They are described as 3/1, 5/1, 7/1 and 10/1. A 3/1 ARM starts out with a low rate that lasts three years, then is adjusted annually. A 5/1 ARM has an introductory rate that lasts five years, and 7/1 and 10/1 ARMs have intro rates that last seven and 10 years. The monthly payment amount is usually subject to a cap.

Amortization: Repayment of a mortgage loan through regular monthly installments of principal and interest. At the end of the scheduled payments (e.g., monthly payments for 15 or 30 years), you will own your home.

Annual Percentage Rate (APR): Calculated by using a standard formula, the APR is expressed as a yearly rate (e.g., 8.107% APR) and includes the interest, points (discount and origination), mortgage insurance, and other fees. The APR on a mortgage will usually be higher than the stated interest rate because the APR includes fees and the interest rate doesn't.

Assets: Assets are anything of financial value that can be converted into cash (i.e., stocks and bonds, automobiles, real estate, retirement funds, and savings).

Assumable mortgage: A mortgage that can be transferred from a seller to a buyer. The buyer then takes over payment of an existing loan.

Automated Underwriting System: A computerized system used to assess information provided by a borrower, plus public information about the borrower, to quickly determine whether a loan should be pre-approved.

Balloon mortgage: A mortgage that typically offers low rates for the first 3 to 10 years, at which point the principal balance needs to be paid in full. Borrowers usually sell before the balance is due or refinance the loan.

Bankruptcy: Bankruptcy is the legal process in which a person declares their inability to pay off their debts. Bankruptcy does not mean you cannot get a loan, but the terms of your loan may not be as favorable.

Borrower: A person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.

Bridge loan: A loan that "bridges" the gap between the purchase of a new home and the sale of the borrower's current home. Usually up to 6 months long.

Cap: A limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.

COFI: Acronym for 11th District Cost of Funds Index, a common index to which loans are tied. The COFI is tied to interest paid on savings accounts.

Collateral: In real estate, property offered to secure [or offered as security for] repayment of a loan, though not with the intention of transferring property ownership.

Credit report: A detailed history of an individual's credit worthiness. This is used by lenders to gauge a potential borrower's ability to repay a loan.

Default: The inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.

Delinquency: A borrower's failure to make mortgage payments when they are due.

Discount point: Discount points are paid to a lender (usually at closing) to reduce the interest rate on a loan. Each point is equal to 1% of the total loan amount. (Also see: Points)

Equity: Calculated by subtracting the amount still owed on the mortgage loan and any liens from the fair market value of the property. Equity grows as the mortgage is paid down and the property appreciates in value.

Fannie Mae: A private, shareholder-owned company that purchases residential mortgages and converts them into securities for sale to investors. Fannie Mae supplies funds that lenders may loan to potential homebuyers. Its original name was Federal National Mortgage Association (FNMA), started by the federal government in 1938.

The Fed: The Federal Reserve System, a network of twelve Federal Reserve Banks and affiliated branches that serves as the central bank of the United States. "The Fed" also often refers to the Board of Governors of the Federal Reserve System. The Fed Board sets overnight lending rates for banks. This is what banks charge each other for borrowing money overnight, which they do when they need to replenish their reserves. The Fed uses these rates to control inflation: if it lowers these rates, more money flows in the form of loans to consumers and businesses; if it raises rates, there are fewer loans. Mortgage rates are not tied to the Fed's rates, but they are influenced by it.

Federal Housing Administration (FHA): The FHA was established in 1934 to advance homeownership opportunities for all Americans. It provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories.

FICO: An acronym for the Fair Isaac Corporation, the company that developed the most commonly used credit scoring system. Credit reporting agencies issue FICO scores to lenders who in turn use them to calculate the risk on a loan.

Fixed-rate mortgage: A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms do not change.

Foreclosure: The legal process by which a bank or lender sells or repossesses a mortgaged property because the borrower could not pay the loan.

Freddie Mac: Created in 1970 by the federal government as the Federal Home Loan Mortgage Corporation, it is a stockholder-owned corporation chartered by Congress to increase the supply of funds that mortgage lenders, such as commercial banks, mortgage bankers, savings institutions and credit unions, can make available to homebuyers and multifamily investors.

Fully amortized loan: If the payment schedule on a loan is met, the loan principal will be entirely paid off at the end of the term.

Ginnie Mae: A government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment. Like Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders. Ginnie Mae stands for Government National Mortgage Association (GNMA).

Good faith estimate (GFE): A written estimate of all expected closing fees including pre-paid and escrow items as well as lender charges. It must be given to the borrower, by a potential lender, within three days after submission of a mortgage loan application. By law, brokers and lenders are required to make as accurate an estimate as possible.

Homeowner's insurance: Provides damage protection for your home and personal property from a variety of events, including fire, lightning, burglary, vandalism, storms, explosions, and more. All homeowner's insurance policies contain personal liability coverage, which protects against lawsuits involving injuries that occur on and off your property. It is required by most lenders.

HUD: The U.S. Department of Housing and Urban Development. Established in 1965, HUD works to create a decent home and suitable living environment for all Americans by addressing housing needs, improving and developing American communities, and enforcing fair laws.

HUD-1 Statement: Also known as the "settlement sheet," it is an itemized listing of closing costs. The closing costs can include a commission, loan fees and points, and sums set aside for escrow payments, taxes and insurance. It is signed by both the buyer and the seller, who may share closing costs.

Index: A measurement used by lenders to determine changes to the interest rate charged on an adjustable rate mortgage.

Interest: A rate or fee charged for the use of borrowed money.

Interest rate: Usually expressed as a percentage, it is the amount of interest charged that determines a monthly loan payment.

Lender: An institution, such as a bank or broker, which loans money to be repaid with interest. Learn more about lenders.

Loan: Money borrowed that is usually repaid with interest.

Loan application: The first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.

Loan-To-Value ratio (LTV): The loan amount divided by either the lesser of the sales price of a property, or its appraised value. The LTV ratio is used during the loan approval period to gauge risk: the higher the LTV ratio, the higher the interest rate, and vice versa.

Lock-in: A guarantee of an interest rate if a loan is closed within a specific time.

Margin: Expressed in percentage points, the amount a lender adds to an index to determine the interest rate on an adjustable rate mortgage.

Mortgage: A lien against real estate given by a buyer or property owner to the lender as security for money borrowed. Essentially, it is a legal agreement that means if the borrower stops making payments, the lender can take possession of the house. (Note: Literal translation is "death pledge." It comes from Latin: mort ["death"] + gage ["pledge"]).

Mortgage banker: One who originates, sells, and services mortgage loans and resells them to secondary mortgage lenders such as Fannie Mae or Freddie Mac.

Mortgage broker: A firm that originates and processes loans for a number of lenders.

Mortgage insurance: A policy protecting lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price. Also known as PMI (Private Mortgage Insurance).

Mortgage Insurance Premium (MIP): Also known as Private Mortgage Insurance (PMI), a monthly payment by a borrower for mortgage insurance. This protects the lender by paying the costs of foreclosing on a house if the borrower stops paying the loan. Mortgage insurance usually is required if the down payment is less than 20 percent of the sale price.

Negative amortization: When the payment on a loan is less than the interest that accrues on the principal. The balance of interest owed is added to the total loan.

Origination: The process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.

Origination fee: The fee a lender charges for processing a loan. This includes the cost to prepare loan documents, check a borrower's credit history, and inspect the property.

Par rate: A rate of interest on a loan for which the lender does not charge (nor pay) points. An interest rate lower than the par rate would cost the broker money; an interest rate higher than the par rate would pay the broker a commission. [The par rate can vary, depending on the qualifications of a particular borrower.]

Points: A point equals 1 percent of a mortgage. Lenders sometimes charge "origination points" to cover expenses of making a loan. Also, borrowers sometimes pay "discount points" to reduce the loan's interest rate.

Pre-Approval: A commitment in writing from a lender that a borrower would qualify for a particular loan amount based on income and credit information.

Pre-Payment Penalty: A pre-payment penalty means that if you pay off your mortgage loan earlier than agreed, you will pay a penalty. However, if you agree to pay a pre-payment penalty, you will usually get a better interest rate.

Pre-qualify: When a lender informally evaluates a borrower's finances to determine how much he or she can afford to borrow and on what terms.

Prime Rate: The published interest rate at which banks make short-term unsecured loans to their best customers. The rate generally is the same across all major banks, and adjusts at the same time.

Principal: The original amount of a debt; a sum of money agreed to by the borrower and the lender to be repaid on a schedule. Interest is calculated as a percentage of principal.

Principal, Interest, Taxes, and Insurance (PITI): The four elements that make up a monthly mortgage payment. The principal and interest payments go towards repaying the loan, while taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.

Principal: The amount of money borrowed from a lender, not including interest or additional fees.

Refinancing: The act of paying off one loan by obtaining another. Refinancing is generally done to secure better loan terms, such as a lower interest rate.

RESPA: The Real Estate Settlement Procedures Act is a 1974 law aimed at protecting consumers by requiring disclosures (including a Good Faith Estimate) and forbidding kickbacks for referrals among the service providers involved in the sale of a home. For example, a real estate agent may not receive a payment for referring the client to a particular title insurance company.

Seller's market: When the demand for homes in a given marketplace exceeds the supply of properties on the market.

Title insurance: Insurance protecting the lender (or a homeowner) against any claims that could arise from arguments about ownership of the property. Should a problem arise, the title insurer pays any legal damages.

Truth-in-Lending: A federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan's initial period and any adjustments to the remaining term of the loan.

Underwriting: The process of analyzing a loan application to determine the amount of risk involved in making the loan. It includes a review of the potential borrower's credit history and a judgment of the property value.

Yield Spread Premium: A percentage of the loan amount, the YSP is what a lender pays a broker for a loan with a higher interest rate, and lower fees.

© Zillow, Inc. 2009. Originally posted - Mortgage Glossary








Home Equity Loans

Need to remodel but no money? Or need a loan to send Johnny to college? You can tap into the equity you have in your home (the amount your house is worth minus what you owe on it) via a Home Equity Line of Credit, or Home Equity Loan.

Home Equity Loans

Home Equity Loans are when a lender gives you a set amount of money and you pay it back over a fixed payment schedule. Typically these loans have fixed interest rates. This is a better option for someone who wants to lock in a fixed interest rate, either because they think interest rates are going to increase or because they like the certainty of knowing what their payment schedule will be.

A home equity loan also is a better option than a home equity line if you know exactly how much money you need to borrow and when you want to borrow it.

How to get a Home Equity Loan or Line of Credit

You can shop anonymously for mortgage rates for a home equity loan or line of credit on Zillow Mortgage Marketplace. Just submit a loan request and you will receive custom quotes instantly from a marketplace filled with thousands of lenders. The process is free, easy and best of all, you are anonymous.

Home Equity Line of Credit

A HELOC, or Home Equity Line of Credit, is the right to borrow up to a certain amount of money from a lender. The "line" is a credit line guaranteed by your house, meaning that if you can't live up to the terms of the line, then the lender has a right (after a few nasty letters) to foreclose on your house. Typically, HELOCs (pronounced HEE-locks) have floating interest rates that can change periodically.

For example, a borrower might obtain a $75,000 HELOC at "prime plus one." This means that the interest rate is one percentage point higher than the Prime Rate. If Prime is 5.5%, then the HELOC is 6.5%. Remember: The rate is tied to the Prime and could change as much as at every billing date. (The change can be dramatic; e.g., in April of 2007, the Prime was 8.25 percent, whereas in June of 2003, it was 4.25 percent.)

Home equity lines can be used by the borrower to pay for anything. You literally get a checkbook for the HELOC and you can write checks to your heart's content until you've maxed out the line's limit. Although HELOCs were originally designed for homeowners to pay for home improvements and other house-related projects, nowadays borrowers use home equity lines for almost anything. Most HELOCs also have online Internet access so you can pay bills online using your HELOC just like you would with a regular online checking account. Like a credit card balance, you can pay down a HELOC at any time, without penalties.

Home equity lines are serious stuff, since they're secured by your house. If you can't meet the payment obligations such as your minimum monthly balance, your homeownership is in jeopardy.

  • Who should get one: Someone who might need extra cash for home improvements, or is looking at borrowing money to buy a different house (in addition to a mortgage).
  • Who shouldn't: Do not use a HELOC to splurge for things like vacations or to finance other consumer debts, like credit card purchases (unless you then plan to tear those cards up!). HELOCs are guaranteed by your house, which means the stakes are very high.

Home Equity Tax and Interest Information

Are HELOCs tax deductible? Sort of. Like first mortgage interest payments, home-equity borrowing differs from credit card debt in that you can deduct the interest on your tax return. But this only applies if you itemize your deductions. Also, the tax deduction on interest is limited to loan amounts up to $100,000, with some restrictions.

What determines the interest rate? The Loan to Value and your credit score determine the interest rate of a home equity loan or line. If your credit score is excellent (760+), you may be able to get an interest rate at the prime lending rate, or possibly lower. A good credit score (700-760) will likely get you an interest rate that is about the same as the prime rate. Poor credit will likely result in rates of 1-5 points higher than the prime rate. Except in some cases, you should be able to avoid fees such as application or appraisal fees, though you might get hit with an annual fee or a small "recording" fee.

Home Equity Loan as a Second Mortgage

HELOCs and home equity loans can also be used as second mortgages at the time of purchase. Frequently they are the second purchase mortgage for 10, 15, or 20 percent of the purchase price when buying a home. Home buyers can avoid buying mortgage insurance (PMI) if they take out two loans instead of one, with no single loan exceeding 80 percent of the purchase price. Home equity loans (or lines) can fill this gap, wherein the first mortgage is frequently 80 percent of the purchase price and the Home Equity Loan is the second mortgage.








Closing Costs, Points

The amount you borrow to actually buy your house is one thing; the fees required to close the transaction are quite another, and they amount to from 3 to 5 percent of your overall mortgage.

At the real estate closing, you will be given a stack of paperwork that shows the loan fees line-by-line. (You should already have seen these in your Good Faith Estimate, but they might vary.) The fees below are what is generally required, but every buyer will not pay every fee listed. For example, maybe you worked a deal with the seller to pick up part of the closing costs. And there are many geographic differences. Finally, all lenders do not charge every fee shown.

Commissions: Payment for the work real estate agents have done. Traditionally it is 6% split between buyer and seller agents; usually 3% to buyer's agent, 3% to seller's agent. The seller usually pays these. Note: These costs are not included in your lender's Good Faith Estimate.

General loan fees

Application fee: An application fee is a fee to reimburse the lender for internal costs associated with initiating the application process, usually under $300.

Appraisal fee: The lender hires an independent appraiser to determine whether the property is worth the sales price you've offered for it. Expect $200-$500. It can be higher or lower, depending on the size of the property and appraisal fees in your area.

Assumption fee: Buyers sometimes take over (assume) the seller's existing mortgage. If so, the lender may charge a variable fee.

Credit report fee: Covers obtaining a credit report to determine whether you are an acceptable credit risk. Also called a "credit check fee," it averages about $25 per credit report checked. although some borrowers have paid three times more.

Interest: Most lenders require the buyer to pay the interest that will accrue on their loan from the date of settlement to the first monthly mortgage payment due date.

Mortgage insurance application fee: When the down payment is less than 20 percent of the purchase price, you are required to carry Private Mortgage Insurance, PMI, to protect the lender should you default on your loan. The lender charges a variable fee to process the application.

Lender's inspection fee: If you are building a new home or buying a home that's under construction, the lender may charge an inspection fee, usually under $100. This pays for an inspection by the lender or outside inspector of your house or property.

Lender's attorney fee: About $400. If a lender involves an attorney in a transaction for any reason, the buyer pays.

Loan origination fee: Fee for establishing a new loan. It is paid to the lender for his or her services in originating the loan. The fee usually varies from 0.5% (half a point) to 2% (two points) of the loan amount.

Loan discount points: Refers to a one-time charge imposed by the lender or mortgage broker to lower the interest rate and therefore the monthly mortgage payment. The more points paid up front, the lower the interest rate. The loan discount is also called "point" or "discount point." Note that the interest rate does not drop by one percent per point.

Mortgage broker fee: Paid to a mortgage broker, typically in a commission based upon the amount borrowed, in return for finding the mortgage.

Mortgage insurance premium: Some lenders require borrowers to pay their first year's mortgage insurance premium up front. Other lenders ask for a lump sum insurance premium payment at closing that covers the life of the loan.

Process fee: Charged by the lender to cover costs associated with the processing and closing of a mortgage loan.

Reserve account funds: Your monthly mortgage payments are likely to include a pro-rated amount to cover payments for property taxes and homeowners insurance. This money is held in a "reserve" or "escrow" account by the lender who makes the payments for you. At closing, your lender may require you to pony up advance payments just to be sure the reserve fund has enough money to pay the bills.

Tax-related service fee: Paid to set up a service which identifies the payment due date of local taxes for the servicer of the loan.

Underwriting fee: Covers the final analysis and approval of the mortgage; often the lender's cost to the investor that will subsequently purchase the loan.

Wire transfer fee: Covers the cost of wiring the money around, which is usually done by escrow.

Insurance and taxes

Annual assessments: If you will have annual assessments made by your condominium or homeowners association, you will have to pay two months' worth up front.

Flood insurance premium: Lenders may require flood insurance, with the premium paid at closing, depending on the property location.

Homeowners insurance premium: A homeowners insurance policy protects the lender (as well as the owner) against loss of the house from fire, wind, or other natural disasters. Usually the buyer pays some of the premium payment at closing.

Taxes: Buyers pay two months' worth of city property taxes and two months of county property taxes at closing.

Title charges

Attorney fees: Varies, but could be $500 to $1000 or more. In some parts of the country an attorney, not a title company, handles closing, and sometimes an attorney is hired by the lender to review certain documents.

Notary fees: Pays for the notary public who witnesses that the signatures on closing documents are made by the people named in them.

Title insurance fees: Average is $350, but could be as high as one percent of the loan. Title insurance is a policy that protects the owner and/or lender by guaranteeing the title to the property is clear.

Title search: About $200. A search is done to make sure there aren't any unpaid mortgages or tax liens on the property.

Government recording and transfer charges

Courier fee: Charged if a courier picks up and delivers documents.

Lead-based paint inspection: Covers the cost of evaluating lead-based paint risk.

Pest inspection: Depending on location, a termite or other pest inspection may be required.

Radon test: Covers the cost of testing for the presence of radon gas, which can be a problem in some parts of the country.

Recording fees: Average about $100. This covers getting the sale recorded in the public record.

Survey: About $1000 for a survey of the property boundaries.

Transfer taxes: This is a fee, usually collected by the state, for transferring the title of the property within a certain time period.

© Zillow, Inc. 2009. Originally posted - Mortgage Fees and Closing Costs






What is an FHA loan?

It's a bit of a misnomer, since Federal Housing Administration (FHA) loans are not loans at all. What they do is insure loans so that lenders can offer mortgage assistance to people who:

  • Have fair or poor credit
  • Have a low down payment (must have at least 3.5%)
  • Have undergone bankruptcy
  • Have been foreclosed on

Essentially, the federal government insures loans for FHA-approved lenders so that lenders reduce their risk of loss if they lend to borrowers who could default on their mortgage payments. The FHA program has been in place since the 1930s to help stimulate the housing market by making loans accessible and affordable. Traditionally, FHA loans have helped military families who return from war, the elderly, handicapped, or lower-income families, but really, anyone can get an FHA loan - they are not just for first-time home buyers.

What are the advantages of an FHA loan?

An FHA loan is the easiest type of real estate mortgage loan to qualify for because it requires a low down payment and you can have less-than-perfect credit. Also, because FHA insures your mortgage, lenders are more willing to provide loans. Another advantage of an FHA loan is it's assumable, which means if you want to sell your home, the buyer can "assume" the loan you have. FHA loans can be used for a home purchase or a refinance.

How do I get an FHA loan

You can shop anonymously for mortgage rates for an FHA loan on Zillow Mortgage Marketplace. Just submit a loan request and you will receive custom quotes instantly from a marketplace filled with thousands of lenders. The process is free, easy and best of all, you are anonymous.

What do I need to qualify for an FHA loan?

  • Must have steady employment history or worked for same employer for the last two years.
  • Must have valid Social Security number, lawful residency in the U.S., and be of legal age to sign a mortgage in your state.
  • Must make a minimum down payment of 3.5% on the house and it can be gifted by a family member (conventional financing does not allow gifting).
  • Must have a property appraisal from an FHA-approved appraiser.
  • Mortgage payment (including principal, interest, property taxes, property insurance) needs to be less than 31% of your gross monthly income.
  • Monthly debt (mortgage, credit cards, auto, student loans, etc.) cannot be more than 43% of your monthly income.
  • No minimum requirement for credit scores, but past credit performance will be scrutinized. FHA-qualified lenders will use a case-by-case basis to determine an applicants' credit worthiness.
  • Must be two years out of bankruptcy, with good credit.
  • Must be three years out of foreclosure, with good credit.

What are the disadvantages of an FHA loan?

You knew there had to be a catch and here it is: Since an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront -or, it can be financed into the mortgage -- and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.

  • Upfront mortgage insurance premium (MIP) Appropriately named, this is an upfront monthly premium payment, which means borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.75% = $5,250. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage.
  • Annual MIP (charged monthly) Called an annual premium, this is actually a monthly charge that will be figured into your mortgage payment. It is based on a borrower's loan-to-value (LTV) ratio and length of loan. There are two different Annual MIP values: 0.50% and 0.55%. If the LTV is less than or equal to 95 percent, a borrower will pay 0.50%. For LTVs above 95 percent, annual premiums will be .55%. Example (for LTV less than 95%): $300,000 loan x 0.5 = $1,500. Then, divide $1,500 by 12 months = $125. Your monthly premium is $125 per month. In most cases, this cost will drop off after five years or when the remaining balance on the loan is 78 percent of the value of the property -- whichever is longer.
  • Property needs to meet certain standards Also, an FHA loan requires that a property meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).

Important note: Prior to Oct. 1, 2008, premiums were figured using a risk-based calculation, taking into account a borrower's credit score and loan-to-value ratio. However, on Oct. 1, 2008, a one-year moratorium was instituted on this method by the Housing and Economic Recovery Act of 2008. Keep current on the premium costs for FHA loans by visiting the U.S. Department of Housing and Urban Development (HUD).

How large of an FHA loan can I get?

While the FHA does not have income or location restrictions, there are maximum mortgage limits that vary by state and county.

Due to tighter lending standards on conventional loans, FHA loans are becoming increasingly popular. For more information on FHA loans, visit the U.S. Department of Housing and Urban Development (HUD).