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1. How do I calculate how much I Pre-Qualify for?
2. What is the difference between pre-qualifying and pre-approval?
3. How long does the loan process take?
4. How do I know what my loan rate will be?
5. How much will my closing costs be?
6. What is a FICO score?
7. What is a rate lock?
8. Can my mortgage loan be sold?
9. What is PMI? Can I get rid of the PMI on my loan?
10. What is Title Insurance?
11. What is a Transfer Tax?
12. What is APR?
13. What does the abbreviation LTV stand for?
14. How do I calculate my loan-to-value ratio (LTV)?
15. Why is the loan-to-value ratio important?
16. What is Debt to Income Ratio (DTI)?
17. Can I make extra principal payments so I can pay off the loan
more quickly?
18. Do I get a tax advantage from having a mortgage?
19. How do I know how much equity I have in my property?
20. How do I calculate the value of my property?
21. Should I refinance?
22. Who is the Mortgagee?
23. Who is the Mortgagor?
1. How do I calculate how much I Pre-Qualify for?
There are many factors we will use to calculate the amount you qualify for including:
credit, income and debts. To get an accurate number as to how much you qualify
for please contact your Mortgage Advisor.
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2. What is the difference between pre-qualifying and
pre-approval?
A pre-qualification is normally issued by a Mortgage Advisor,
who, after interviewing you, determines the dollar value of a
loan you can be approved for. However, Mortgage Advisors do not
make the final approval, so a pre-qualification is not a commitment
to lend. After the Mortgage Advisor determines that you pre-qualify,
he/she then issues you a pre-qualification letter. This pre-qualification
letter is used when you are making an offer on a property. The
pre-qualification letter indicates to the seller that you are
qualified to purchase the house you are making an offer on. Pre-approval
is a step above pre-qualification. Pre-approval involves verifying
your credit, down payment, employment history, etc. Your loan
application is submitted to an underwriter and a decision is made
regarding your loan application. If your loan is pre-approved,
you are then issued a pre-approval certificate. Getting your loan
pre-approved allows you to close very quickly when you do find
a house. A pre-approval can help you negotiate a better price
with the seller, since being pre-approved is very close to having
cash in the bank to pay for the house.
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3. How long does the loan process take?
We have closed loans in as short a time as one week, but, again,
the length of time varies according to the type of loan. Once
you identify a property, the average time to close is generally
3 to 5 weeks. There are certain factors that determine the time
frame, such as the length of time it takes to get appraisal performed,
title searches (if there are liens to be satisfied), etc.
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4. How do I know what my loan rate will be?
Rates vary primarily based on the type and purpose of the loan,
your credit history and income, loan amount, value of the property,
and the number of points you are willing to pay. In order to get
a precise number, please contact your Mortgage Advisor.
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5. How much will my closing costs be?
The amount of closing costs will depend on what items are customary
for buyers and sellers to pay for in your area. Traditions vary
greatly from one area of the country to another. In PA, the buyer
pays for title insurance, which is state regulated. There is also
a Transfer Tax, which varies by county. Your Mortgage Advisor
can give you specific information on the items that are customarily
paid for by buyers in your area. In addition, the amount of closing
costs will depend on the amount of points you will be paying with
your mortgage loan, since these are generally paid for up-front.
(A point is 1% of your mortgage loan amount).
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6. What is a FICO score?
A FICO score is a credit score developed by Fair Isaac & Co.
Credit scoring is a method of determining the likelihood that
credit users will pay their bills. Fair, Isaac began its pioneering
work with credit scoring in the late 1950s and, since then, scoring
has become widely accepted by lenders as a reliable means of credit
evaluation. A credit score attempts to condense a borrower’s
credit history into a single number. Fair, Isaac & Co. and
the credit bureaus do not reveal how these scores are computed.
The Federal Trade Commission has ruled this to be acceptable.
Credit scores are calculated by using scoring models and mathematical
tables that assign points for different pieces of information
which best predict future credit performance. Developing these
models involves studying how thousands, even millions, of people
have used credit. Score-model developers find predictive factors
in the data that have proven to indicate future credit performance.
Models can be developed from different sources of data. Credit-bureau
models are developed from information in consumer credit-bureau
reports.
Credit scores analyze a borrower's credit history considering
numerous factors such as:
• Late payments
• The amount of time credit has been established
• The amount of credit used versus the amount of credit available
• Length of time at present residence
• Employment history
• Negative credit information such as bankruptcies, charge-offs, collections,
etc.
• There are really three FICO scores computed by data provided by each of
the three bureaus––Experian, Trans Union and Equifax. Some lenders
use one of these three scores, while other lenders may use the middle score.
How can I increase my score? While it is difficult to increase
your score over the short run, here are some tips to increase
your score over a period of time. Pay your bills on time. Late
payments and collections can have a serious impact on your score.
Do not apply for credit frequently. Having a large number of
inquiries on your credit report can worsen your score.
Reduce your credit-card balances. If you are "maxed" out
on your credit cards, this will affect your credit score negatively.
If you have limited credit, obtain additional credit. Not having
sufficient credit can negatively impact your score.
What if there is an error on my credit report? If you see an
error on your report, report it to the credit bureau. The three
major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union
(1-800-916-8800) and Experian (1-888-397-3742) all have procedures
for correcting information promptly. Alternatively, your mortgage
company may help you correct this problem as well.
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7. What is a rate lock?
You cannot close a mortgage loan without locking in an interest
rate. There are four components to a rate lock:
• Loan program.
• Interest rate.
• Points.
• Length of the lock.
The longer the length of the lock, the higher the points or
the interest rate. This is because the longer the lock, the greater
the risk for the lender offering that lock. Let's say you lock
in a 30-year fixed loan at 8% for 2 points for 15 days on March
2. This lock will expire on March 17 (if March 17 is a holiday
then the lock is typically extended to the first working day after
the 17th). The lender must disburse funds by March 17th, otherwise
your rate lock expires, and your original rate-lock commitment
is invalid.
The same lock might cost 2.25 points for a 30-day lock or 2.5
points for a 60-day lock. If you need a longer lock and do not
want to pay the higher points, you may instead pay a higher rate.
After a lock expires, most lenders will let you re-lock at the
higher of the original price and the originally locked price.
In most cases you will not get a lower rate if rates drop, unless
it drops more than a .25%. Lenders can lose money if your lock
expires. This is because they are taking a risk by letting you
lock in advance. If rates move higher, they are forced to give
you the original rate at which you locked. Lenders often protect
themselves against rate fluctuations by hedging. Some lenders
do offer free float-downs––i.e. you may lock the rate initially
and if the rates drop while your loan is in process, you will get the better
rate. However, there is no free lunch––the free float-down is costly
for the lender and you pay for this option indirectly, because the lender has
to build the price of this option into the rate.
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8. Can my mortgage loan be sold?
Your loan can be sold at any time. There is a secondary mortgage
market in which lenders frequently buy and sell pools of mortgages.
This secondary mortgage market results in lower rates for consumers.
A lender buying your loan assumes all terms and conditions of
the original loan. As a result, the only thing that changes when
a loan is sold is to whom you mail your payment. If your loan
has been sold, your existing lender will notify you that your
loan has been sold, who your new lender is, and where you should
send your payments from now on.
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9. What is PMI on a Mortgage? Can I get rid of the PMI
on my loan?
PMI or Private Mortgage Insurance is normally required when
you buy a house with less than 20% down. Mortgage insurance is
a type of guarantee that helps protect lenders against the costs
of foreclosure. This insurance protection is provided by private
mortgage-insurance companies. It enables lenders to accept lower
down payments than they would normally accept. In effect, mortgage
insurance provides what the equity of a higher down payment would
provide to cover a lender's losses in the unfortunate event of
foreclosure. Therefore, without mortgage insurance, you might
not be able to buy a home without a 20% down payment.
The cost of PMI increases as your down payment decreases. Example:
The cost of PMI on a 10% down payment is less than the cost of
PMI on a 5% down payment. Your PMI premium is normally added to
your monthly mortgage payment. The decision on when to cancel
the private insurance coverage does not depend solely on the degree
of your equity in the home. The final say on terminating a private
mortgage-insurance policy is reserved jointly for the lender and
any investor who may have purchased an interest in the mortgage.
However, in most cases, the lender will allow cancellation of
mortgage insurance when the loan is paid down to 80% of the original
property value. Some lenders may require that you pay PMI for
one or two years before you may apply to remove it. To cancel
the PMI on your loan, contact your lender. In most cases, an appraisal
will be required to determine the value of your property. You
will probably also be required to pay for the cost of this appraisal.
Another way of canceling the PMI on your loan is to refinance
and to get a new loan without PMI.
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10. What is Title Insurance?
Title insurance is required by almost all lenders when purchasing
or refinancing a property in PA and this is typically provided
by the closing agent . The title company will perform a “title search” to make sure the property
is clear of all liens, or the liens will most likely have to be satisfied at
closing. They will also contact local tax collectors to make sure all the taxes
are current and then issue title commitment.
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11. What is a Transfer Tax?
Pennsylvania law provides for a state and local tax on the sale
of real estate. All types of real property, including residential,
commercial, and agricultural, are subject to the realty transfer
tax. As provided under the authority of the Realty Transfer Tax
Act, Pennsylvania currently assesses a 1% statewide transfer tax
on the actual sales price of a property. In addition to the statewide
tax, the Local Real Estate Transfer Tax Act allows local communities to assess
up to an additional 1% tax. This additional 1% local tax is typically apportioned
evenly between the local government and school district.
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12. What is APR?
The Annual Percentage Rate, which must be reported by lenders
under Truth in Lending regulations, and is given to the borrower
in the Truth-In-Lending Form. It is a comprehensive measure of
credit cost to the borrower that takes account of the interest
rate, points, and flat dollar charges. It is also adjusted for
the time value of money, so that dollars paid by the borrower
up-front carry a heavier weight than dollars paid ten years down
the road. However, the APR is calculated on the assumption that
the loan runs to term, and is therefore potentially deceptive
for borrowers with short time horizons. It shows the “total
cost” of the loan.
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13. What does the abbreviation LTV stand for?
This stands for Loan to Value. It represents the percentage
size of the loan based on the value of the property.
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14. How do I calculate my loan-to-value ratio (LTV)?
The loan-to-value ratio (or LTV) is one of the most important
factors in your loan process. It is typically used by lenders
and banks to determine the limits within which your housing and
debt ratios must fall for you to be approved. It can also determine
which fees you will be charged for your loan and the amount of
these fees. It will also determine whether you must pay Private
Mortgage Insurance (PMI) and use an impound/escrow account.
Your loan-to-value ratio (LTV) is simply the amount you are borrowing
divided by the value of the subject property you are purchasing
or refinancing. This gives you a simple ratio. For example, a
house valued at $100,000 which you intend to purchase with an
$80,000 loan (and a $20,000 down payment of your own cash) is
said to have an LTV of 80 percent - that is, the loan represents
80 percent of the value of the house. The value of your property
is its appraised value OR the amount you pay for the property
(the market value), whichever is lower. In the initial stages
of qualification and approval, your property's value is understood
to be an estimate. It will be confirmed, if necessary for your
particular loan, by a professional appraiser hired by Sabre Financial
Group.
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15. Why is the loan-to-value ratio important?
Your loan-to-value ratio (LTV) shows your equity in the property.
Your equity is basically the amount of the property you own, expressed
as a monetary figure. Another way of thinking of your equity is
that it's the amount of money you'd receive if you sold your property
at its valued price, less what you'd have to return to your lender
to repay the loan. Example: $100,000 value minus $50,000 to repay
loan = $50,000 equity. Your LTV and equity are crucial because
common wisdom among lenders is that the higher the LTV (and the
lower the equity), the higher the risk of a borrower defaulting
on his or her loan. Thus, low equity loans present lenders with
greater risk, forcing them to increase their costs.
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16. What is Debt to Income Ratio (DTI)?
Your debt to income ratio (DTI) is a key indicator of your true
financial picture. It is definitely the lending industry's measure
of fiscal health. Your debt to income ratio is calculated by dividing
monthly minimum debt payments (excluding mortgage or rent, utilities,
food, entertainment) by monthly gross income. For example, someone
with a gross monthly income of $2,000 who is making minimum payments
of $400 on debt (loans and credit cards) has a debt to income
ratio of 20 percent ($400 / $2000 = .20). Lenders will then add
your new mortgage payments, taxes and insurance to your debts
and calculate your total debt to income ratio. Typically lenders
will go to 40 or 45% DTI, but can go as high as 55-60% DTI. The
higher your DTI, the riskier your loan is, thus the higher your
rate will be.
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17. Can I make extra principal payments so I can pay
off the loan more quickly?
Depending on the loan, and what your state permits, it is feasible
for you to make extra payments on the loan. Extra payments will
have an effect on the amortization schedule over the remaining
term of your loan. In some cases, you may have a pre-payment penalty,
which is usually about 5% of the unpaid principal balance.
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18. Do I get a tax advantage from having a mortgage?
You should consult a tax attorney or accountant for specific
details, but interest on a mortgage is usually tax deductible.
Interest on credit cards or automobile loans is not normally tax
deductible.
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19. How do I know how much equity I have in my property?
Equity is the value of a homeowner's interest in real estate.
Equity is computed by subtracting the total of the unpaid mortgage
balance and any outstanding liens or other debts against the property
from the property's fair market value. A homeowner's equity increases
as he or she pays off his or her mortgage or as the property appreciates
in value. When a mortgage and all other debts against the property
are paid in full, the homeowner has 100 percent equity in his
or her property.
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20. How do I calculate the value of my property?
Since a mortgage is a loan secured by a piece of real property,
a crucial factor is in the correct value of the property in question.
Property value can be determined in a number of ways:
1. The market value of the property - that is, what a buyer
will pay for it and what other comparable properties (comps)
in the neighborhood have recently sold for.
2. The appraised value of the property - that is, what a trained
and licensed professional deems the property to be worth based
on an inspection, comps, and a thorough analysis of the property
and its neighborhood.
3. Additionally, the appraiser estimates the replacement value
of the property - that is, the cost to build a house of similar
size and construction on a vacant lot. The appraiser reduces
this cost by an age factor to take into account deterioration
and depreciation.
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21. Should I refinance?
The most common reason for refinancing is to save money. Saving
money through refinancing can be achieved in two ways:
First, by obtaining a lower interest rate that causes one's monthly
mortgage payment to be reduced. Second, by reducing the term of
the loan, thus saving money over the life of the loan. For example,
refinancing from a 30-year loan to a 15-year loan might result
in higher monthly payments, but the total of the payments made
during the life of the loan can be reduced significantly.
People also refinance to convert their adjustable loan to a fixed
loan. The main reason behind this type of refinance is to obtain
the stability and the security of a fixed loan. Fixed loans are
very popular when interest rates are low, whereas adjustable loans
tend to be more popular when rates are higher. When rates are
low, homeowners refinance to lock in low rates. When rates are
high, homeowners prefer adjustable loans to obtain lower payments.
A third reason why homeowners refinance is to consolidate debts
and replace high-interest loans with a low-rate mortgage. The
loans being consolidated may include second mortgages, credit
lines, student loans, credit cards, etc. In many cases, debt consolidation
results in tax savings, since consumers loans are not tax deductible,
while a mortgage loan is tax deductible.
The answer to the question "Should I refinance?" is
a complex one, since every situation is different and no two homeowners
are in the exact same situation. Even the conventional wisdom
of refinancing only when you can save 2% on your mortgage is not
really true. If you are refinancing to save money on your monthly
payments, the following calculation is more appropriate than the
rule of 2%:
1. Calculate the total cost of the refinance––example:
$2,000
2. Calculate the monthly savings––example: $100/month
Divide the result in 1 by the result in 2––in this
case 2000/100 = 20 months. This shows the break-even time. If
you plan to live in the house for longer than this period of time,
it makes sense to refinance. Sometimes, you do not have a choice––you
are forced to refinance. This happens when you have a loan with
a balloon provision, but with no conversion option. In this case
it is best to refinance a few months before the balloon comes
due.
Whatever you choose to do, consulting with a seasoned Mortgage
Advisor can often save you time and money.
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22. Who is the Mortgagee?
The mortgagee is the lender.
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23. Who is the Mortgagor?
The mortgagor is the borrower.
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