Please browse this section for answers to some Frequently Asked Questions. If you do not find the answer you are looking for below, please contact us at (717)840-4981.
As a first-time buyer, what is the best way to get started in purchasing a home?
The first step is to figure out how much you can afford. Many borrowers prefer to get pre-approved by a lender, which will guarantee a maximum purchase price to the borrower. Also, pre-approved borrowers generally get preferential treatment by selling realtors. Since the seller knows the borrower is pre-approved, that can often times lead to a reduced purchase price.
Is it necessary to get pre-qualified before shopping for a home?
While not necessary, it is highly recommended that you get pre-qualified before making an offer. It can be frustrating for both the buyer and the seller to make an offer on a home only to find out later that you will not qualify for it. It is very advantageous to know what you can afford before shopping.
What is the difference between loan pre-qualification and pre-approval?
A pre-qualification occurs when a prospective buyer discloses, either verbally or by providing documentation of their income, assets and credit so that a loan agent may determine the loan amount that a borrower could likely qualify for based on standard lending guidelines. A pre-approval involves an underwriter (the lender's risk evaluator) actually reviewing a prospective buyer's loan application with a formal credit determination occurring that is subject to an appraisal, title report and purchase contract, along with whatever supporting documentation the underwriter may request.
Will the lender require a Property Appraisal, and do I need one?
Real estate appraisal, property valuation or land valuation is the practice of developing an opinion of the value of real property, usually its Market Value. The need for appraisals arises from the heterogeneous nature of property as an investment class: no two properties are identical, and all properties differ from each other in their location - which is one of the most important determinants of their values.
A real estate appraisal is generally performed by a licensed or certified appraiser. Appraisal information is typically conveyed on a standardized form, such as the Uniform Residential Appraisal Report.
How much of a down payment does it make sense to make?
There is no easy answer to this question. The higher your down payment, the less interest you will pay over the life of the loan. However, interest on home mortgages is tax deductible and a higher down payment would mean you would be giving up that potential tax savings.
The answer to this question is oftentimes determined by your current financial situation: e.g. just because you have the funds for a large down payment doesn't always mean you should withdraw funds from current investments to make it. The best advice we can give you is to consult with a financial advisor or tax consultant, allowing them to review your situation and advise you. You might also check these IRS websites:
Is it possible for relatives to give me a gift for a down payment?
Yes. A portion of the down payment may be gifted, depending on loan type, so long as the relative is not expecting repayment of the funds. The lender will likely ask the donor to sign a statement stating that the gift funds are not expected to be repaid.
What are "points", and how do I know whether I should pay them?
Points, sometimes also called "discount points", are a form of pre-paid interest. One point equals one percent of the loan amount. By charging a borrower points, a lender effectively increases the yield on the loan above the amount of the stated interest rate. Borrowers can offer to pay a lender points as a method to reduce the interest rate on the loan, thus obtaining a lower monthly payment in exchange for this up-front payment.
Paying points represents a calculated gamble on the part of the buyer. There will be a specific point in the timeline of the loan where the money spent to buy down the interest rate will be equal to the money saved by making reduced loan payments resulting from the lower interest rate on the loan.
Selling the property or refinancing prior to this break-even point will result in a net financial loss for the buyer while keeping the loan for longer than this break-even point will result in a net financial savings for the buyer. The longer you keep the property financed under the loan with purchased points, the more the money spent on the points will pay off. Accordingly, if the intention is to buy and sell the property or refinance in a rapid fashion, buying points is actually going to end up costing more than just paying the loan at the higher interest rate.
Points may also be purchased to reduce the monthly payment for the purpose of qualifying for a loan. Loan qualification based on monthly income versus the monthly loan payment may sometimes only be achievable by reducing the monthly payment through the purchasing of points to buy down the interest rate, thereby reducing the monthly loan payment.
Discount points may be different from origination fees or broker fees. Discount points are always used to buy down the interest rates, while origination fees are sometimes fees the lender charges for the loan or sometimes just another name for buying down the interest rate. Origination fee and discount points are both items listed under lender-charges on the HUD-1 Settlement Statement.
The difference in savings over the life of the loan can make paying points a benefit to the borrower. If you intend to stay in your home for an extended period of time, it may be worthwhile to pay additional points in order to obtain a lower interest rate. Any significant changes in fees should be re-disclosed in the final Good Faith Estimate (GFE).
Also directly related to points is the concept of the ‘no closing cost loan’. If points are paid to acquire a loan, it is impossible at the same time for a broker, bank or lender to make a premium for a higher rate. When a premium is earned by making the note rate higher, this premium is sometimes used to pay the closing costs.
What is a rate lock?
A rate lock is a means for the borrower to lock in the lender’s current interest rate. Typically, a rate lock will last 15, 30 or 45 days, If a rate is locked in, it cannot rise if economic activity increases rates, but it also cannot fall if rates decrease.
Can I borrow money for my down payment?
No. It is not possible to borrow money for a down payment in the traditional sense. However, it is allowable to borrow funds from your current investments, such as your 401(K). You may also borrow against a current residence to purchase a new one, such as a home equity loan.
What does it mean to “close” a mortgage loan?
Real estate property in most jurisdictions is conveyed from the seller to the buyer through a real estate contract. The point in time at which the contract is actually executed and the title to the property is conveyed to the buyer is known as the “closing”. During the closing process, you should expect to sit with a Settlement Agency in your area to review and sign the final documents, including the Deed of Trust, that will transfer the ownership of the property to you.
Adjustment Period: The time between one rate change and the next is called the adjustment period.
Adjustable Rate Mortgage (ARM): A fully amortizing loan with an interest rate that can change upward or downward at set periods of time based on the performance of an established index, such as the Treasury Securities.
Amortization: The gradual pay down of a loan over a pre-determined period of time; initially, most of payment is interest; in time, more principal is paid than interest.
Annual Percentage Rate (APR): A rate based on the fact that in securing a mortgage loan, there are other finance costs in addition to the interest on the loan making the effective rate, or APR, higher; allows equal rate comparison among lenders.
Appraisal: The evaluation of a home relative to other recently-sold homes with similar characteristics to establish its market value.
Balloon Loan: A short-term loan with relatively small payments but one large payment due at a specific date to pay the remaining balance.
Closing: The act of signing the legal documents to transfer ownership and/or acknowledge debt in financing real estate; the end of the loan application process.
Closing Costs: Fees charged by closing agents, lenders, and other third parties in connection with closing a mortgage loan.
Conforming Loan: A conventional mortgage loan made within the guidelines established by Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corp. (FHLMC); current maximum loan of $417,000.
Conventional Loan: A mortgage loan that typically requires 5% to 10% down as a minimum and may be held by the lender or sold to FNMA, FHLMC, or a Private Investor.
Conversion: The option to change from an ARM to a Fixed Rate Mortgage at some point during the term of the loan.
Credit Report: A detailed report on an individual’s use of credit over time; also checks public records for tax liens and judgments; used in evaluating an individual for a new loan.
Credit Score: A score derived from an individual’s credit data at a credit agency; reflects the risk of delinquency, default, bankruptcy, and/or foreclosure relative to many other individuals’ borrowing histories.
Debt Consolidation: Paying off existing, high-rate consumer debt (credit cards, student loans, auto loans) with a new loan or line of credit secured by the equity in a home, generally at a much lower rate than the consumer debt.
Debt-to-Income Ratio: The ratio of one’s minimum monthly credit payments (including the mortgage payment) to his/her gross monthly income; the second of the qualifying ratios.
Discount Points: Fees paid at closing to decrease the interest rate for the life of the loan.
Equity: The market value of a home minus any mortgage debt on the home.
Equity Line of Credit: A source of credit secured by equity in a home that is accessible as needed through a credit card or checks and paid down in a similar fashion; interest paid is usually tax deductible.
Equity Loan: A source of credit secured by equity in a home; funds are received at closing in a lump sum and repaid according to an amortization schedule; interest paid is usually tax deductible.
Escrow Account: An account managed by the lender to ensure that taxes, homeowner’s insurance, and mortgage insurance are collected monthly from borrowers with their payment and paid to taxing authorities and insurance companies as the amounts come due either annually or semi-annually.
Federal Home Loan Mortgage Corp. (FHLMC): FHLMC buys loans from lenders, providing liquidity to meet housing finance needs of the general public.
Federal Housing Administration (FHA): FHA provides lenders with insurance and guarantees to make housing finance affordable to the general public; down payments are typically less than for a Conventional Loan.
Federal National Mortgage Association (FNMA): FNMA buys loans from lenders, providing liquidity to meet housing finance needs of the general public.
Fixed Rate Mortgage: A fully amortizing loan that has a stated rate and payment that remain constant throughout the life of the loan.
Floating: During the processing of a loan, the rate is said to be floating if it is not locked-in, meaning it rises and falls with the daily changes in the financial markets.
Good Faith Estimate (GFE): An estimate of the closing costs and expected new loan payment based on a loan amount, a sales price, a term, and an interest rate.
Government National Mortgage Association (GNMA): GNMA buys FHA and VA loans from lenders, providing liquidity to meet housing finance needs of the general public.
Housing and Urban Development (HUD): An agency within the federal government that establishes and monitors housing development and finance.
Housing Ratio: The ratio of the house payment (principal, interest, insurance and taxes) to the gross monthly income; the first of the qualifying ratios.
Impounds: The monthly amounts collected within the mortgage payment for insurance, taxes, and mortgage insurance; see escrow account.
Index: An average or indicator of market conditions usually expressed in percentages. The One Year US Treasury Security is a common index used in adjusting interest rates on ARM loans.
Interest Rate: The percentage paid for the use of money, usually expressed as an annual percentage.
Investor: A person or institution that invests in mortgages or mortgage backed securities.
Jumbo Loan: A loan made in excess of $417,000 currently; varies as does the Conforming Loan amount.
Lifetime Cap: A limit on the amount that your rate can change over the entire period that you have the loan.
Loan to Value Ratio (LTV): The loan amount divided by the value of the property, generally expressed as a percentage.
Lock-in: During the processing of a loan, a lender can lock-in the interest rate until closing, preventing it from rising if economic activity increase rates, but also preventing it from falling.
Low-Cost Loan: A loan for which the lender pays some of a borrower’s closing costs through a slight increase in the interest rate.
Margin: A percentage stated in the note that is added to the index to arrive at the Contract Rate.
Mortgage Insurance: Insurance paid for by borrowers with a down payment of generally less than 20%; applies to conventional loans only; usually paid as an impound and from the escrow account.
Mortgage Insurance Premium (MIP): Insurance paid for by all borrowers utilizing FHA loans; generally added to the loan balance with a small premium also paid monthly.
Mortgagee: The lender in a mortgage transaction.
Mortgagor: The borrower in a mortgage transaction.
Non-Conforming: Mortgage loan products that do not meet the guidelines of FNMA or FHLMC due to type (second mortgage), size (greater than $417,000), or credit history.
Note: A promise to pay a specific amount at a specific time usually secured by a Deed of Trust.
Option: A choice to change certain terms of the original loan contract if specified guidelines are met.
Origination Fee: Fee paid to the lender at closing that represents their fee for making the loan; generally no more than 1% of the loan amount.
Periodic Rate Cap: A limit on the amount that a rate can change on an annual or semiannual basis.
Points: Terms used to describe fees paid at closing to reduce the rate, e.g. Discount Points; one point equals one percent of the loan amount.
Pre-Paids: Amounts collected at closing for interest, taxes, and insurance that are due or will be due as part of the monthly payment, or in connection with the closing.
Prequalification: A quick analysis of an individual’s income and debts to determine an approximate loan amount for which the individual would qualify.
Principal, Interest, Taxes, and Insurance (PITI): Abbreviation for Principal, Interest, Taxes, and Insurance; the mortgage payment.
Private Investor: A private corporation whose business it is to purchase mortgage loans from lenders made to the private investor’s guidelines.
Private Mortgage Insurance (PMI): See Mortgage Insurance.
Qualifying Ratios: Comprised of the three ratios that help a lender prequalify a prospective customer to determine the best loan program for that individual’s needs and abilities; <debt-to-income, housing, and LTV.
Rate: A percentage stated in the note and charged over the term of the loan that can remain constant or that can change at stated intervals during the time that you have the loan.
Right of Recission: A "cooling-off period" between the act of closing a refinance or equity loan by the borrower, and the act of funding that loan by the lender; this is a federal and/or state requirement that generally runs 3 full business days.
Rider: An attachment to the Deed of Trust that defines certain terms of the note.
Second Mortgage: A mortgage loan or line-of-credit made in addition to an already existing first mortgage; generally used for home improvements, debt consolidation, and major purchases such as an automobile or college education.
Survey: The "blueprint" of a lot, showing its boundaries, any structures and improvements, and any legal or illegal rights-of-way held by others.
Title Insurance: Insurance coverage that precludes a new property owner from being liable for any claims made by anyone against the property and the prior owners.
Underwriting: The process of reviewing an individual’s income and credit file, and the property appraisal to determine the ability and willingness of the individual to repay the loan they are requesting, and to assess the condition and value of the property they are attempting to finance.
Veteran's Administration (VA): Agency within HUD that guarantees a portion of a loan made to a Veteran under guidelines established by the VA; very low cost source of mortgage funds for Veterans only.