Frequently Asked Questions or FAQ
If you can't find the answer to any of your questions here, feel free to contact us.
The Questions
How much money can I qualify for?
What if I've had credit problems?
What is the difference between a conventional loan and an FHA loan?
What is "private mortgage insurance"?
Who are "Fannie Mae," "Freddie Mac" and "Ginnie Mae"?
What is the difference between fixed rate mortgages and adjustable rate mortgages?
What is a "convertible mortgage?"
What is an "adjustment interval?"
What is "amortization?"
What are "points?"
What does "APR" stand for?
What is an "index?"
What is a "buy-down?"
What are "caps"?
What is "locking-in?"
What is "PITI?"
What is an appraisal?
What is closing?
What is "escrow?"
What are "closing costs?"
What happens at closing?
How often do I have to make mortgage payments?
What happens if I'm late with a payment or miss a payment?
What is "foreclosure?"
What if I want out of my mortgage?
The Answers
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How much money can I qualify for?
Credit scoring is dominating how people qualify today. The better your credit score, the more you qualify for. You can usually qualify for a monthly mortgage payment about two-thirds of your gross income. That payment could be more with a higher credit score or less with a lower credit score. Please see our Credit Score page for more information on credit scores.
Generally speaking, you will qualify for a monthly mortgage payment between 32-38 percent of your gross monthly income. This assumes that you do not have more than 10-15 percent of monthly debt obligation. Check with your River City Mortgage & Financial loan officer for more details.
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What if I've had credit problems?
FHA, VA, Fannie Mae, Freddie Mac require that borrowers have re-established their credit for the last two years. The time period begins when the late payments have ended and after everything, judgments, tax liens, etc. have been paid off. Exceptions can be made in situations where there are medical, economic and other circumstances beyond your control.
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What is the difference between a Conventional, a VA and an FHA loan?
Today there is little difference. All of these loans have zero down loans, adjustable rate products, loan-to-value requirements, terms and use similar underwriting guidelines to qualify. The three main differences:
- Mortgage insurance is generally less on conventional loans (none with 20-percent down):
- VA requires you to be a veteran to qualify with day care costs which are normally very high;
- FHA and VA loans are generally easier to qualify for an dare more accepting of less money down.
Interest rates are normally the same or similar. It is important that you discuss all of the products and choices with your River City Mortgage & Financial loan officer to find out which product is best for you.
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What is "mortgage insurance?"
Mortgage insurance is a premium that is charge, upfront or monthly, that covers the cost of foreclosures.
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What is an Adjustable Rate Mortgages?
Adjustable Rate Mortgages (“ARM”) differ from fixed rate mortgage in that the interest rate changes (adjust) at a fixed time. A one-year mortgage adjusts once a year and a six month mortgage adjust every six months. There are one month, six month and one, three, five seven and ten year adjustable mortgages, to name a few.
When the interest rate changes, it is usually tied to an index, such at the one-year treasury or Libor Index. Your new rate would be the index plus the margin, which is the profit to the investor, usually around 2.75% and it is normally subject to maximum and minimum interest rate changes. Your lender should have a disclosure that needs to be signed by you that explains how the program works.
ARM’s are generally a good idea if you think rates are going to stay low, you have the tolerance for upward rate movement or you do not intend to stay in the property longer. In some cases it is simply easier to qualify because the rate is lower; however, some ARM products require that you qualify at a higher interest rate. There are many other aspects to an ARM and you should make sure that you understand how it changes and what the worse case scenario could be when making a decision to take an ARM product.
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What is an Balloon Mortgage?
Balloon mortgages are fixed for a certain period of time, typically five or seven years. After the initial fixed period, the mortgage balloons and become due in full. Most balloons offer a conversion to allow the mortgage to continue, however, it will normally convert at .625% above the Fannie Mae sixty-day mandatory yield for the balance of the term of the loan. in some cases, it does pay to just refinance. Balloons are sometimes referred to as 5/25 or 7/23 programs.
The reason some people take these mortgages is because the rates are sometimes more competitive interest rate than a fixed rate mortgage and less volatile than an Adjustable Rate Mortgage. Your lender should have a disclosure that will need to be signed by you that explains how the program works.
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What is a "convertible mortgage?"
Convertible Mortgages allow you to convert the mortgage to current interest rates on certain loans that have a conversion option such as Adjustable Rate and Balloon mortgages. If the mortgage offers a conversion, it will normally convert at a pre-determined time to the current interest rates plus a percentage added to the loan for profit.
The conversion will be clearly spelled out in the mortgage at the time of the closing. Your lender should have a disclosure that needs to be signed by you that explains how the program works.
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What is an "adjustment interval?"
This is the time between changes in the interest rate and/or the monthly payment on an adjustable rate mortgage.
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What is "amortization?"
The gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time. Such payments must be sufficient to cover both principal and interest or the loan will become negative amortizing, principal balance goes up instead of down.
Principal is the amount borrowed, or the part of the amount borrowed which remains unpaid (excluding interest). The principal part of the monthly payment reduces the unpaid balance.
Interest is the fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time value of money, the credit risk of the borrower.
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What are "discount points?"
Discount points are pre-paid interest on your mortgage, charged up-front at the time of closing. One point is equal to one-percent of the loan amount. Paying discount points upfront will lower the interest rate over the term of the loan. It generally does not make financial sense to pay points up front, even though they might be eligible as a tax write-off on your taxes.
To determine whether paying points make sense for you, take the dollar amount paid up front and divide it by the difference in payment. If it takes longer than 20-30 months to pay it back, it generally does not make sense to pay discount points. The most common reason that people pay discount points are; you need a lower interest rate to qualify, your company has agreed to pay up to a certain amount of relocation costs, you are going to live in the house for a long period of time, etc. Please consult your loan officer, accountant and financial planner to make these type of decisions.
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What does "APR" stand for?
APR is an interest rate on the Truth-In-Lending Disclosure which calculates with the lender’s closing costs in the rate over the term of the loan. It is not the interest rate that you will be paying. The purpose of this disclosure is to allow the consumer to shop one interest rate with each lender that includes the closing costs to simplify the shopping process. The higher the lender’s costs, the higher the APR. The lower the lender’s costs, the lower the APR. Disclosure is required under Federal Law through the Real Estate Settlement Procedures Act (RESPA).
The Finance Charge disclosed on the Truth-In-Lending Disclose is the interest that you will pay over the term of the loan. Any required pre-payment penalty, late penalties, etc. will also be disclosed on this form. Although the form is hard to understand, you should make sure that you fully understand it prior to signing it.
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What is an "index?"
An index is a financial reference rate on which a lender basis mortgage and other loan rates, usually tied to adjustable rate and balloon loans to name a few. Typical indexes include the rate of return on one, three and five year treasury bills or the monthly average interest rate on loans closed by savings and loan associations.
As this rate goes up or down, so will your mortgage rate. If your loan is subject to this type of adjustment, a margin (profit) is added to the index, and then rounded to the nearest .125% to come up with the new interest rate.
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What is a "buy-down?"
There are two types of buy-downs, permanent and temporary. Permanent buy-downs are done when you pay up-front discount points to buy the rate down permanently for the term of the loan. For instance, if rates were at 8.125%, you might pay one discount point up-front to buy the rate down for the term of the loan to 8.00%.
A Temporary buy-down is a fixed rate loan; however, money is put into escrow to subsidize the payment in the first couple of years. For instance, if your interest rate is 8.00% and you chose to do a 2-1 buy-down, the lender would calculate the difference in payments for the first year at 6.00% and take the difference, put it into an escrow account. You would make the payment at 6.00% and the lender would take the difference between what you paid and the actual payment at 8.00% out of the escrow account. This would take place the second year at 7.00% and after the second year you would be require to make the rest of the payments at 8.00%.
The purpose of this program is to allow for consumers to buy the rate down temporarily with fixed increases. Normally this program is used to qualify for a lower house payment or higher mortgage and the consumer does not want an adjustable rate mortgage. The down fall is getting someone to pay the monies up-front to accomplish this. Often times this is paid by the seller to help the buyer.
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What are "caps?"
Caps are limits that are placed on the changes allowed in the interest rate and/or monthly payment on an adjustable, balloon mortgages. For example, if you had a one-year adjustable rate mortgage and the caps were 2.0% per year and a 6.0% lifetime cap, then the most that it could go up or down is 2.0% in any one year and 6.0% over the lifetime of the loan. Example; if your start rate is 5.00% and the lifetime cap is 6.00%, the lifetime cap of this loan would be 11.00%.
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What is "locking-in?"
We are in a world environment where interest rates change every second of the day. Locking-in means that for a fee, generally called a Commitment Fee, your lender will guarantee the interest rate on your mortgage for a limited period of time until you close.
You also have the option to float your loan if you think rates will fall between the time that you take loan application and closing. Many states require written lock agreements to be signed by you and the lender.
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What is "PITI?"
PITI means principal, interest, taxes and insurance. These are the components that are paid monthly to your lender. Taxes and insurance can be paid by you directly; however, there is often an upfront cost to do so. The principal and interest can also be paid bi-weekly which will reduce the length of time that it will take to payoff your mortgage. In most cases you can prepay principal without penalty which will also reduce the length of time to payoff your mortgage.
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What is an appraisal?
Lenders require an appraisal to establish the home’s value and to make sure that the home is worth what you paid for it. The appraisal will also disclose to the lender any work that may need to be repaired prior to closing such as a bad roof, broken windows, wet basement, etc.
Value is established by comparing three similar homes within the same neighborhood. Adjustments are then made for differences in the homes such as square footage differences, number of bedrooms, quality of construction, age, etc.
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What is closing?
Closing is a time that is set between a buyer and seller to legally transfer the property and funds associate with the sale of a home. Every state handles the closing process differently. Some states do escrow closings and the closing paperwork is done when you purchase the home. Possession of the property usually takes place immediately after the closing.
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What is "escrow?"
Escrow is the process wherein a neutral, third-party is responsible for carrying out the buyer’s and seller’s instructions and paperwork relating to closing. For instance, if the builder cannot finish a driveway until spring, the funds would be held in an escrow account until the work is finished.
Escrow can also refer to an account set up by mortgage lender to collect monies monthly in the buyer’s payment and pay for taxes and insurance.
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What are "closing costs?"
Closing Costs are those costs that are charged by the lender, Title Company, attorney, county, state, etc. to process the closing of your home. These costs generally around 2.5% of your loan amount and include such things as the cost to process the loan, title search and insurance, taxes, plat drawing or survey, etc.
Cost can vary considerably from lender-to-lender and should be shopped by the consumer. Many lenders offer no-cost loans, however, it generally means a higher interest to cover the cost of doing the loan.
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What happens at closing?
This is also called the "settlement." The buyer, seller and lender -- or their agents -- meet and legally transfer the property and all associated funds.
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How often do I have to make mortgage payments?
Mortgage payments are usually paid once a month and are due on the first of the month. If payment is not received by the lender by the 15th of the month, there is usually and late payment fee. It is normally 4-5 percent of the payment.
Some lenders will allow bi-weekly payments that will pay the loan down sooner. You are usually required to have the payment taken out automatically if you choose this option.
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What happens if I'm late with a payment of miss a payment?
Mortgage payments are usually due on the first day of every month. If the lender receives your payment after the 15th of the month, there is normally a late fee that is equal to 4-5 percent of the payment.
If you are past 30-days late, the late payment will be reported to the credit bureaus and the lender will contact you to see what is going on. Continued delinquency or defaulting on the mortgage (failing to make one or more payments) can lead to the lender to start legal foreclosure proceedings and/or judgment against you for the amount owed.
The lender does not want to take any home back. If you find yourself in a situation where you cannot make the payments, call the lender and see if they will work something out with you.
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What is "foreclosure?"
"Foreclosure" is a legal action undertaken by a lender to sell a mortgaged property in order to pay a defaulting borrower's debt.
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What if I want out of my mortgage?
You may pay off the loan prior to the end of the term. Some mortgages do have a prepayment penalty, buy many do not. Ask your lender or broker about the program you are applying for.
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