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Frequently Asked QuestionsWhat is a Credit Score? Your Credit Score is a statistical method that lenders use to quickly and objectively assess the credit risk of a loan applicant. The score is a number that rates the likelihood you will pay back a loan. Scores range from 350 (high risk) to 800 (low risk). There are a few types of credit scores, the most widely used are FICO scores, which were developed by Fair Isaac & Company, Inc. for each of the credit reporting agencies. Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount or demographic factors like gender, race, nationality or marital status. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score. What factors contribute to my Credit Score? Different portions of your credit file are given different weights. They are:
The most important factor for a good credit score is paying your bills on time. Even if the debt you owe is a small amount, it is crucial that you make payments on time. In addition, you may want to keep balances low on credit cards and other "revolving credit;" apply for and open new credit accounts only as needed; and pay off debt rather than moving it around. Also don't close unused cards as a short term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score. Recent changes minimize the negative effects that rate shopping can have on a mortgage applicant. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for scoring purposes for the first 30 calendar days; then, multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report. Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that you did not score higher. The reason codes can help a lender describe the reasons for higher than expected rates or loan denial. Scores are not part of the credit profile and are not covered by the Fair Credit Reporting Act. Your credit report must contain at least one account which has been open for six months or greater, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage. What is the difference between the interest rate and the annual percentage rate (APR)? Interest rate is the contractual rate that you agree to pay for your mortgage loan. This rate is used to calculate the interest portion of your monthly mortgage payment. Annual percentage rate (APR) includes your interest rate and factors in the prepaid finance charges to give you an average yearly rate. APR can be a good tool to use when you're comparison shopping for rates. What costs are involved in getting a mortgage? Here's what you'll have to pay when you close on a mortgage loan: Down Payment: Money that is due up front on the home purchase. It will decrease the amount of money you need to borrow. You can put down as little as 0%, although many people put down between 10% and 20%. For example, if you buy a home for $100,000 and have $10,000 for the down payment, you're putting 10% down and will have to finance $90,000 with a mortgage. Private Mortgage Insurance (PMI): This is insurance provided by a private company that protects lenders against loss in the case a borrower defaults on the mortgage loan. Most banks require that you put 20% down to waive PMI. Closing Costs: These include fixed costs (application fee, loan origination fee, document preparation fee and escrow fee) and variable costs (fees for appraisal, credit report, flood zone determination, doc. stamps, intangible tax, Florida 9 Endorsement, pest inspection, recording fees, survey and final review). Closing costs vary by lender. Prepaid Interest: This amount varies, depending on when your mortgage loan is filed with the county recorder's office. You will be charged interest from the date the mortgage loan is filed to the end of the month. That can be between one day and 31 days of interest. For example, if your mortgage loan is filed on the 15th of the month, you would be charged for 13-16 days of interest in escrow (depending upon the month when it was filed). Your first mortgage payment would be due on the first day of the second month following the recording of your mortgage. For example, if your mortgage loan is recorded on January 15, you would pay 16 days of interest when the loan is closed. The first monthly payment would be due March 1. Title Insurance: An insurance policy that protects the buyer, mortgagee or other party from financial losses resulting from problems or defects with the property's title. Points: This is a one-time charge that you can choose to pay in order to lower the interest rate on your loan. Each point is equal to one percent of your loan amount. For example, if your loan amount is $90,000, then one point is equal to $900. You can select zero, one, two or three points to pay on your fixed rate loan. Each additional point lowers your interest rate a little more. Tax Reserve: If the ratio of your loan to the value (LTV) of your property is greater than 70%, Third Federal requires that your real estate taxes be collected monthly with your mortgage payment. Your real estate taxes are held in escrow until your municipality requires payment. The lender will then issue payment for your real estate taxes on your behalf. The number of months to be held in escrow to set up the tax reserve will be based on when the loan is filed and when the next tax bill is due. The dollar amount collected each month for the tax reserve will be based on the last available tax bill. Should I refinance my home loan? What to consider:
The maximum amount that you can borrow can not exceed 89.99% (80% if the home is a secondary residence) of the value of the home and includes rolling the closing costs into the loan or getting cash out. Your debt-to-income ratios must be able to support your new monthly mortgage payment. To get started immediately click here for our online application. Your property must be owner-occupied or a secondary residence and either a single-family or double-family home. How can I apply for a mortgage loan? When applying for a mortgage loan, you will need to provide the following:
What are low down payment options, for buyers who can't afford a 20% down payment? Assuming you can afford (and qualify for) high monthly mortgage payments and have a high credit score, you should be able to find a low (5% to 15%) or even no down payment loan. However, you may have to pay a higher interest rate and loan fees (points) than someone making a larger down payment. If you put down less than 20%, you may have to either pay for private mortgage insurance (PMI) or, to avoid PMI, take out two separate loans (a first mortgage and a second mortgage). What is private mortgage insurance (PMI)? Private Mortgage Insurance or "PMI" policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and your house isn't worth enough to entirely repay the lender through a foreclosure sale. Most lenders require PMI on loans where the borrower makes a down payment of less than 20%. Premiums are usually paid monthly and typically cost around one-half of one percent of the mortgage loan. You can normally cancel the PMI once your equity in the house reaches 20-25%, so long as you have made timely mortgage payments. Can I tap into my IRA or 401(k) plan for down payment money? Let's start with the IRAs. Under the 1997 Taxpayer Relief Act, certain homeowners can withdraw up to $10,000 penalty free from an individual retirement account (IRA) for a down payment to purchase a principal residence (though you might have to pay income tax on the amount withdrawn). If you have a Roth IRA, however, you must have had the account for five years to make tax-free withdrawals. This $10,000 is a lifetime limit -- and the money must be used within 120 days of the date you receive it. The law limits use of this benefit to so-called "first-time homeowners" -- but generously defines these as people who haven't owned a house for the past two years. If a couple is buying a home, both must be first-time homeowners. Ask your tax accountant for more information, or check IRS rules at www.irs.gov. If you have a 401(k), you have two options. One is to do a so-called hardship withdrawal -- but, because this would subject you to taxes and a 10% penalty, we recommend you avoid this. You can also take an ordinary loan from your 401(k) plan without penalty, as long as meet certain conditions and you promise to pay it back.
Keep in mind, however, that you'll need to repay the loan with after-tax dollars, and you'll forego the earnings on the 401(k) money you withdraw -- until it is paid back. Ask your employer or plan administrator whether your plan allows loans. If it does, the maximum loan amount under the law is one-half of your vested balance in the plan, or $50,000, whichever is less. (If, however, you have less than $20,000 in your plan, your limit is the amount of your vested balance, but no more than $10,000.) Other conditions, including the maximum term, the minimum loan amount, the interest rate, and the applicable loan fees, are set by your employer. Any loan must be repaid in a "reasonable amount of time," although the Tax Code does not specifically define what is “reasonable”. Be sure to find out what happens if you leave your job before fully repaying a loan from your 401(k) plan. If a loan becomes due immediately on your departure, income tax penalties may apply to the outstanding balance -- but you may be able to avoid this hassle by repaying the loan before you leave the job. What kinds of government loans are available to homebuyers? Several federal, state, and local government financing programs are available to homebuyers. The two main federal programs are:
VA loans. U.S. Department of Veterans Affairs (VA) loans are available to men and women who are now in the military and to veterans with honorable discharges who meet specific eligibility rules, most of which relate to length of service. The VA doesn't make mortgage loans, but guarantees part of the house loan you get from a bank, savings and loan, or other private lender. If you default, the VA pays the lender the amount guaranteed and you in turn will owe the VA. This guarantee makes it easier for veterans to get favorable loan terms with a low down payment. For more information, check the VA's Website at www.va.gov or contact a regional VA office for advice. FHA loans. The Federal Housing Administration (FHA), an agency of the Department of Housing and Urban Development (HUD), insures loans made to all U.S. citizens, permanent residents, and noncitizens with work permits who meet financial qualification rules. Under its most popular program, if the buyer defaults and the lender forecloses, the FHA pays 100% of the amount insured. This loan insurance lets qualified people buy affordable houses. The major attraction of an FHA-insured loan is that it requires a low down payment, usually about 3% to 5%. For more information on FHA loan programs, contact a regional office of HUD or check the FHA website at www.hud.gov. For information on other government loans, contact your state and local housing offices. They often have programs available for first-time homebuyers who are purchasing modestly priced properties. To find your state housing office, check the State and Local Government on the Net Directory at http://statelocalgov.net. Or, go to your state's home page, where you may find the listing for your state's housing office. What's the difference between a fixed and adjustable rate mortgage? With a fixed rate mortgage, the interest rate and the amount you pay each month remain the same over the entire mortgage term, traditionally 15 or 30 years. A number of variations are available, including five- and seven-year fixed rate loans with balloon payments at the end. With an adjustable rate mortgage (ARM), the interest rate fluctuates according to the interest rates in the economy. Initial interest rates of ARMs are typically offered at a discounted ("teaser") interest rate that is lower than the rate for fixed rate mortgages. Over time, when initial discounts are filtered out, ARM rates will fluctuate as general interest rates go up and down. Different ARMs are tied to different financial indexes, some of which fluctuate up or down more quickly than others. To avoid constant and drastic changes, ARMs typically regulate (cap) how much and how often the interest rate and/or payments can change in a year and over the life of the loan. A number of variations are available for adjustable rate mortgages, including hybrids that change from a fixed to an adjustable rate after a period of years, or "option ARMs" that allow you to choose, on a monthly basis, whether to pay a minimum amount, an interest-only amount, an ordinary principal plus interest amount, or an accelerated payment amount. Which is better -- a fixed or adjustable rate mortgage? It depends. Because interest rates and mortgage options change often, your choice of a fixed or adjustable rate mortgage should depend on:
When mortgage rates are low, a fixed rate mortgage is the best bet for many buyers. Over the next five, ten, or thirty years, interest rates are more apt to go up than further down. Even if rates could go a little lower in the short run, an ARMs teaser rate will adjust up soon and you won't gain much if you plan to stay in the house more than a few years (the broker can tell you your break-even point). In the long run, ARMs are likely to go up, meaning many buyers will be best off locking in a favorable fixed rate now and not taking the risk of much higher rates later. Keep in mind that lenders not only lend money to purchase homes; they also lend money to refinance homes. For example, if you take out a fixed rate loan now, and several years from now interest rates have dropped, refinancing will probably be an option. |
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