WHAT IS PRE-QUALIFICATION?
A loan pre-qualification means that your credit and income has been verified and meets the initial loan requirements. In order to be pre-qualified a loan originator must review your credit report and your income documents to ensure you meet the loan guidelines. Please note, by law, you cannot be “approved” until the underwriter reviews your full file which includes a fully executed purchase agreement. This is why you must make an offer on a home and get a signed purchase agreement in order to get your file to the underwriter.
WHAT IS AN EARNEST MONEY DEPOSIT?
You may be asked to put down an earnest money deposit, often referred to as an EMD. The earnest money deposit is used as a good faith estimate to ensure the seller that are serious about purchasing the home as the home will be taken off the market once there is a contract on the home. If you cannot get financed for any reason, including appraisal or inspection issues, the EMD should be refunded to you per the financing contingency in your purchase contract. If you simply change your mind and decide not to purchase the home you may lose your EMD. The earnest money can be applied towards the purchase if necessary, in the case where you have a down payment required or if money is required for closing.
WHAT IS A SELLER CONCESSION?
A seller concession is also sometimes referred to as a seller credit. This is a monetary amount that is “credited” to you at closing from the seller. This money is to be used for your closing costs. It is typically represented as a percentage of your loan amount. Government loans will allow up to 6% of the purchase price in seller concessions and conventional loans will allow up to 3%. Any money that the seller agrees to pay towards your closing costs needs to be spelled out in the purchase agreement as seller concessions.
WHAT IS A USDA LOAN?
A USDA Loan is one of the only true “No Money Down” loans still available. It is designed specifically for those buyers that cannot qualify for traditional conventional mortgage loans due to one or more of the following: down payment, credit score, limited assets, and limited credit history. It is a government insured loan and offers low rates and only a fixed 30 year term. The mortgage insurance is much less compared to other loan programs currently available. USDA is only available in eligible areas and there are income limits that the household must be under in order to qualify.
WHAT IS A VA LOAN?
A VA loan is a loan available only to veterans. It does not require any money down and has no monthly mortgage insurance. It is available in any area and there are no income limits. If you have used your VA loan in the past you STILL may be eligible to use it again.
WHAT IS A FHA LOAN?
An FHA mortgage loan is a government loan that is insured by the Federal Housing Administration. The FHA does not give you the loan. Rather, it insures loans made by private lenders/banks. Essentially, this means that if you default on your loan and go into foreclosure, FHA will pay a portion of the money lost to the lender. The loan requires 3.5% down payment and does have upfront mortgage insurance as well as monthly mortgage insurance. There will be some type of mortgage insurance on any loan whenever you do not put 20% down. FHA is more manageable than some of the private mortgage insurance options.
WHAT IS A CONVENTIONAL LOAN?
A conventional mortgage loan is a loan secured by investors, but neither insured by the FHA, USDA nor guaranteed by VA. Both fixed rate and adjustable rate loans are available with conventional financing. The credit requirements are usually much stricter for conventional loans and they require between 3%-20% down payment. If you do not have 20% down there will be private mortgage insurance in your monthly payment.
WHAT IS AN APPRAISAL?
An appraisal is a report done by a licensed appraiser to determine the current value of the home based on the recent sales of similar homes in the area. The appraisal must be ordered by the lender and the buyer can not have any choice in the appraiser. The appraiser will come to the home (for FHA, VA, USDA and most conventional loans) and do a basic inspection of the home to make sure it is safe and livable and to ensure it meets HUD’s guidelines. This is not a home inspection, only a determination of value to make sure you are not borrowing more than the home is worth.
WHAT IS A RATE LOCK?
A rate lock is when your loan’s interest rate is locked in for a specific period of time to avoid a higher rate if rates go up. The typical lock periods are 15, 30 and 45 days. If you lock for longer sometimes the rate is not as low. If you lock your loan and the rates end up going down, you are still stuck with the higher rate that you locked at.
WHAT DOES A BUYER’S AGENT (REALTOR) DO?
The buyer’s agent is the realtor that is representing the buyer in a purchase transaction. The buyer’s agent is typically contacted at the start of the home buying process and assists the buyer in finding their new home. The realtor has access to the MLS (Multiple Listing Service) which lists all the homes that are currently for sale along with specific information about how long it has been listed, if there is a current offer etc. The buyer’s agent will also prepare any offers and purchase agreements to make sure their client is protected during the purchase transaction.
WHAT DOES A SELLER’S AGENT (REALTOR) DO?
A seller’s agent is the realtor that is representing the seller of a home. When the seller gets ready to put the home on the market they may contact a realtor to help them sell the home. The seller’s agent will help them determine a reasonable listing price as well as market the property to potential buyer’s to get it sold quickly. They will typically handle the showings of the home as well to take that burden off of the seller.
WHAT DOES A TITLE COMPANY DO?
A title company makes sure that the title to a piece of real estate is legitimate and then issues title insurance for that property. Title insurance protects the lender and/or owner against lawsuits or claims against the property that result from disputes over the title. Title companies also often maintain escrow accounts — these contain the funds needed to close on the home — to ensure that this money is used only for settlement and closing costs, and may conduct the formal closing on the home. At the closing, a settlement agent from the title company will bring all the necessary documentation, explain it to the parties, collect closing costs and distribute monies. Finally, the title company will ensure that the new titles, deeds and other documents are filed with the appropriate entities.
WHAT IS HOMEOWNERS INSURANCE?
Homeowners insurance is required insurance for all mortgage loans. You must maintain insurance on the property in case of any loss. Insurance ensures the lender/bank that even due to a total loss of the property they will still get paid for the mortgage. Depending on the actual policy you take out it can also cover theft, natural disasters and other issues with the home. The more you want covered, the higher the premium will be.
WHAT IS A FUNDING FEE?
A funding fee is the upfront fee that is financed into your loan to account for the mortgage being more risky due to you not putting 20% down. Statistics show that the rate of default on mortgages with less than 20% down is far greater than those that put 20% down. If you do not put any money down and your home goes into foreclosure, the bank loses 100% of that money. The mortgage insurance goes to reimburse the banks when foreclosures take place. The funds are sent to the loan insurer such as FHA, VA, USDA or the private mortgage insurance companies and are held by those companies and released to lender if they have to foreclose on the property.
WHAT IS MORTGAGE INSURANCE?
The mortgage insurance is a monthly fee that is financed into your payment to cover the loss of foreclosures. This is similar to the funding fee although the funding fee is collection at one time, up front, and the monthly mortgage insurance is built into your payment. USDA and FHA mortgage insurance will be in your monthly payment for the full term of your loan. With conventional loans you can sometimes petition this to be removed once you owe less than 80% on the home.
WHAT HAPPENS AT LOAN CLOSING?
At the loan closing the title company will send an agent or you will meet at their office and they will provide you with all the documents needed to close on the mortgage transaction. The agent will be there to guide you through the signing of the loan documents. Once everything is signed, they will forward the signed documents to the lender so that they can disburse the funds for your loan.
DO I NEED AN INSPECTION?
Typically, you do not need an inspection for the mortgage financing. This is up to the individual underwriter, but most of the times you will not need it to obtain financing. In many cases it is wise to get a home inspection for your peace of mind in case there are major issues with a home. A home warranty will not cover issues with the home that were already there when you bought it so a home warranty is not a replacement for a home inspection.
WHAT IS TITLE INSURANCE AND WHY DO I NEED IT?
Title insurance protects the lender and/or owner against lawsuits or claims against the property that result from disputes over the title.
HOW DO I VERIFY INCOME IF I AM SELF-EMPLOYED?
If you are self-employed the underwriter will look at your last two years of tax returns in order to gauge an accurate reflection of your income. They will take an average over the past two years of the income you claimed as a profit. If you claim a loss, they will consider that as not having any income from the self-employment. An easy way to think of it is that if you do not pay taxes on the money, you cannot use it as income to buy a home. If you write off all of your income you are not paying taxes on it.
HOW LONG OF A JOB HISTORY DO I NEED?
The underwriter will need to VERIFY your last 24 months of employment history. This does not necessarily mean you need to be employed for the last 24 months to qualify. There are certain cases in which you do not need a full 24 month employment history such as if you were in school or if you were a stay at home parent returning to the workforce. If you have large gaps in your employment during the prior 24 months you may need to be at your current job for at least six months. Every individual scenario is different, so there is not a set answer.
WHAT IF I HAD A BANKRUPTCY IN THE PAST?
A bankruptcy in the past is not an automatic issue that will prevent you from buying a home. In general, you will need to wait 24 months from the date your Chapter 7 bankruptcy was discharged. A chapter 13 is different and you can potentially qualify while in the Chapter 13 if you can show 12 months of on time payments to the trustee. If you are purchasing while in a Chapter 13 you would need to get approval from the Bankruptcy court/Trustee.
WHAT IS CONSIDERED AN INCOME PRODUCING PROPERTY FOR USDA LOANS?
USDA views an income producing property as any property with the “ability” to produce income. They do not look at whether the home is currently being used to produce an income OR whether the new buyer plans on using it for income purposes. As long as the ability to generate an income exists it will not qualify for USDA. A few typical examples of income producing qualities are: multiple outbuildings (barns or other buildings), large horse barns with multiple stalls, in law-suites, garage apartments etc.