Loan Information

How much of a down payment will I need to buy a home?

A down payment of 20% has been the benchmark for conventional financing, but today many options are available, some requiring as little as 0% down. For buyers who qualify for conventional financing but can’t handle the high down payment requirements, lenders offer this financing with PMI (Private Mortgage Insurance). Designed to protect the lender against default by the borrower, PMI allows you to obtain traditional financing with a down payment significantly lower than the standard 20%.

Government insured loans are also available from 0% to 3% down.

How does a lender determine the maximum mortgage I can afford?

The three primary areas lenders examine in determining the size of the mortgage you can handle are your monthly income, non-housing expenses, and cash available for down payment and closing costs.

There are a number of different ways lenders interpret these variables to estimate your mortgage capacity. The most popular method is detailed here. Most lenders feel a family should spend no more than 28% of its gross monthly income on housing costs, including the mortgage, insurance, and real estate taxes. Also, these housing costs plus your long-term debts (car loans, student loans, etc.) shouldn’t exceed 36% of your income–or government loans at 29/41% ratio.

What are the steps involved in the loan process?

The information your lender needs is not much different than what is needed when you apply for a major credit card: names and addresses of your employer and bank account numbers and balances. The lender will also need other financial information, such as installment payments, auto loans, charge cards, and department store accounts. The location and description of the property are also required, as well as a professional appraisal of the property you’re wanting to purchase.

Are there any mortgages especially Designed for the first-time buyers?

Today, first-time buyers enjoy a number of mortgage options that make purchasing a home more affordable by minimizing down payments and keeping monthly payments as low as possible during the early years of the loan.

Most ARMs (Adjustable Rate Mortgages) feature an interest rate that is often below market for the first year and may only rise gradually after that. Therefore lowering your house payment in the beginning.

VA and FHA-insured loans call for extremely low down payment (0-3% of the purchase price) and offer the benefit that 100% of your down payment can come as a gift.

Finally, first-timers who can find a cooperative seller or third-party investor can look into such nontraditional financing methods as a lease/buy arrangement.

Can I get an FHA or VA mortgage?

Just about anyone can apply for an FHA-insured mortgage through banks and other lending
institutions. They are particularly well-suited for buyers of moderate income; the low down payment requirements (as low as 3% of the purchase price) are matched by a relatively low maximum mortgage amount.

Similarly, VA-guaranteed loans often require no down payment for up to four times the amount
guaranteed by the VA. These loans are reserved for active military personnel, veterans, or spouses of veterans who died of service-related injuries.

What are “points”?

In real estate, the term “point” refers to a percentage, usually 1% of the total mortgage loan amount. Buyers often pay lenders this supplemental fee, calculated in points, to get a better interest rate on a particular mortgage.

For instance, a lender may offer you a choice of two 30-year mortgages: the first at 10% with no points and the second at 9% with an additional three points. If the loan is for $100,000, those three points will cost you an extra $3,000 up front—but you’ll get a payback of significantly lower monthly payments ($840.85 vs. $877.57) for the lifetime of the loan.

Many lenders will advise you to pay the points for the better rate if you can afford it, especially if you plan on keeping the home for more than a few years. Like interest, the money you pay for points may be tax-deductible, and the investment may pay for itself through savings generated by lower monthly payments. We suggest you call your tax preparer for more information.

What is APR, and how is it calculated?

The annual percentage rate is a calculated rate of interest for a loan over its projected life. This rate includes the interest, all points (which are considered prepaid interest), mortgage insurance, and other charges associated with making the loan that the lender collects from the borrower. The APR is calculated by a standard formula that all lenders use. This enables the borrower to comparison shop between lenders and/or loan products, based not just on interest rate charged but also on fees incurred to obtain the best rate.

What is a good faith estimate?

Your lender or loan agent must provide you with a good-faith estimate within three days of your application. This is the information you need to make a fair and accurate judgment when shopping for a loan. Your estimate is a written document that shows all the costs that can be estimated in advance by the lender. You need this information so there are no surprises on the day you close your sale on the property to be purchased. You should review all costs, know which ones are non-refundable in the event your loan is not approved, and be prepared to pay outstanding fees. You may also want to compare these costs to those charged by other lenders when shopping for your home plan.

What does my monthly mortgage payment include? And what does PI and PITI stand for?

The bulk of your monthly mortgage payment goes toward paying off the principal and interest of your loan (often lenders refer to this as “PI” or Principal and Interest). In addition, most lenders require that you pay a sufficient amount to cover your local real estate tax, plus your homeowner’s or hazard insurance (this “total” payment is referred to as “PITI” or Principal, Interest, Taxes, and Insurance).

This amount is placed in an escrow account from which your lender than pays your tax and insurance bills as they come due. When shopping for a loan, it is important to ask the lender if the monthly
payment you are being quoted is PI or PITI.

What are the respective advantages of 15-year and 30-year terms?

As you’d expect, a 15-year monthly mortgage means higher monthly payments than an equivalent 30-year loan . . . but not as much higher as you think. At the same rate of interest, payments on the 15-year mortgage are roughly 20-25% higher than a loan that takes twice as long to pay off. But one of the benefits of choosing a 15-year mortgage is that you can generally get a lower interest rate for an otherwise similar loan. Another advantage is faster equity build-up because a larger portion of your early payments are going to pay off principal. This makes the 15-year mortgage an ideal alternative for couples approaching retirement or anyone else interested in owning their home free and clear as quickly as possible.

The 30-year fixed mortgage remains the standard mortgage with an array of valuable benefits
designed especially for buyers who expect to stay

in their home for a long time. Because the borrower pays more interest than principal for the first 23 years, the tax deduction is substantial. And as inflation causes income and living expenses to increase, your unchanging monthly mortgage payments account for a relatively smaller portion of income as the years go by.

What is PMI?

PMI is Private Mortgage Insurance. It is insurance for the lender in the event a borrower defaults on their mortgage payments. Any loan amount that is higher than 80% LTV (Loan-To-Value) requires PMI, as this is considered a “high-risk loan” for the lender.

Examples: If a home appraises for $100,000, then PMI is required on any loan amount higher than $80,000. If a home appraises for $200,000, then PMI is required on any loan amount higher than $160,000.

Exceptions to PMI: If you obtain a USDA loan or VA loan, then there will be no PMI required. Instead, there is a higher than normal “Funding Fee” included in the closing costs of the loan, but this “Funding Fee” can be financed into the loan (so you do not need to pay the “Funding Fee” up-front.

How can I find out what my property tax bill will be?

Usually the total amount of the previous year’s property taxes is included on the listing information sheet for the home you’re interested in. Remember, tax rates change from year to year, so the previous year’s tax bill should be considered simply as a ballpark figure of what you would pay.

What can I do if I have a fixed rate loan, and interest rates go down?

When interest rates drop significantly, the homeowner should investigate the financial advantages of refinancing. Essentially, this means taking out a new loan to pay off your existing loan.

Refinancing may require paying many of the same fees paid at the original closing, plus origination fees. Most mortgage experts agree that if you can get a rate 2% less than your existing loan and you plan staying in your home for at least 18 months, refinancing is a good investment.

What is the difference between pre-qualifying and pre-approval?

Pre-qualifying for a mortgage up to a certain amount is an increasingly popular practice among buyers who don’t want to worry about going through the approval process after they’ve found the home they want. It is a verbal exchange
in which the lender tells you in advance approximately how much money the buyer is able to borrow, based upon the information you provide the lender on your debt and income.

Pre-approval goes a step further than
pre-qualifying. It is an actual commitment to lend, provided that, when the borrower is ready to buy, he or she still meets all the qualifying conditions that were met at the time of conditional approval. We strongly recommend it!

Can I pay off my loan early?

If you can afford it and are interested in the considerable advantages of having more equity and/or owning your home free and clear at the earliest

possible date, the answer in most cases is yes. If you’re unsure about the rules governing prepayment, review your mortgage agreement, as some do have pre-payment penalty clauses


Save extra every month.

With the interest you earn on your savings, you may be able to make an extra payment at the end of the year. Pay an extra twelfth of your TI payment monthly and your 30 year mortgage will pay off in 22 years.

Whichever method you choose, be sure to clearly indicate that the excess payment is to be applied to the principal.