Mortgage FAQs

Before you start house hunting and getting pre-approved for a home loan, check your credit report and get your FICO scores.

Why? Your credit rating may be the single most important piece of financial information you have to obtain a mortgage at the best interest rate. Checking your credit rating before you purchase will give you time to correct reporting errors and to clean up your ratings if they are in the dumps. One lender tells us that it can take up to 90 days to get erroneous — and costly — information off your report, although some prospective borrowers say they have a much quicker outcome.

What’s in a Credit Report?
Credit reports are a history of your track record of borrowing and repaying banks, credit card companies, and any other lenders. When you apply to borrow money, the lender uses the credit report to decide if you are a safe bet, or a risk. They also base whatever interest rate they offer on that report and the resulting credit score.

A credit report includes:

• Credit history. This includes account information detail, such as your payment history, and specifically information about accounts that may have been sent to debt collection agencies. It also includes the number of accounts you have and the type of each, and if you are in good standing with each.
• Who is examining your credit. Any inquiries by lenders or others about your credit is recorded as well.
• Any judgments against you, such as bankruptcy.
• Personal information about you, such as your addresses (current and past), Social Security number and your previous employers.
• A section for comments by you, in the event you have disputed the report specifics in the past.

How to Request a Report
There are three major credit-reporting agencies: Equifax, TransUnion, and Experian. You can receive a free copy of your credit report once a year from AnnualCreditReport.com, which gets the reports from each of the three companies.

It is a good idea to get a copy annually so that you can check it for errors. Errors range anywhere from name misspellings and incorrect Social Security numbers to accounts being listed as still open when in fact they have been closed — an error that can hurt you when you need to get a mortgage.
Your credit report also will show whether you have been the victim of identity theft. If your personal information, such as your Social Security number, has been changed, the report will reveal it.

Finding Mortgages and Refinancing With Bad Credit
So, what do you do if your credit reports make you want to hide under the covers and never use your credit cards again? Relax, you can turn your ratings around.

Mortgage lenders look at the “age,” dollar amount, and payment history of your different credit lines. That means opening accounts frequently, running up your balances, and paying on time or not at all can impact your credit score negatively. Just changing one of these components of your spending behavior can positively affect your credit score. Also, bad credit does not necessarily mean you can’t get a mortgage, it will just come at a higher cost.

“Why Me?”
If you are having trouble getting a loan, ask your lender why.
Chances are it will be one of these reasons for rejection:

• Overextended credit cards: If you miss payments or exceed your limit, that’s a red flag to lenders.
• Failure to pay a previous or existing loan: If you have defaulted on other loans, a lender will think twice.
• Bankruptcy: Filed for bankruptcy in the past seven years? You might have trouble getting a loan.
• Overdue taxes: Lenders check your tax payment record.
• Legal judgments: If you have a judgment against you for such things as delinquent child support payments, it could harm your credit.
• Collection agencies: Lenders will know if collection agencies are after you.
• Overreaching: You might be seeking a loan outside what you can reasonably afford.

Fixing Bad Credit
Many financial experts suggest common sense strategies to turn your credit report around:

• Always pay your minimum balance on time. Let’s face it, credit card companies make profits on you when you maintain a balance. Just make sure you send them their due each month.
• Better yet, only spend what you can expect to pay back at bill time.
• Try to reduce balances. Even throwing in an extra $20 to $50 each month will help reduce the overall debt, and paying extra looks good on your credit report.
• Don’t run up the entire balance: Having $100 left on a $10,000 line of credit doesn’t look so hot. Lenders look at the dollar amount of credit available to you and, from there, what percentage of that credit you have used. In other words, if you have a card with a $1,000 limit and you’ve spent $900 on that card, you’ve used 90% of your available credit; this looks a lot worse than having a balance of, say, $200 on the card.
• Throw away new credit card offers. Don’t apply for new cards and lines of credit right before you go home shopping. And when those clerks in the stores offer you a discount if you just open an account, say no. Banks will not turn a blind eye to numerous inquiries for new credit. If bad credit continues to dog you, the FHA loan programs may be your ideal option. With down payments as low as 2%, Americans with good and bad credit have been getting into their first homes with these federally insured loans since 1934.

Bad Credit
Having bad credit is not the end of the world. It still may be possible for lenders to give you a loan, provided your credit score is not too low. But be aware that you may pay a higher interest rate and more fees since you are more likely to default (fail to pay the loan back).

There are ways you can improve your credit score, such as paying down your debts, paying your bills on time, and disputing possible errors on your credit report. But on the flip side, there are ways you can also hurt your score, so remember:

• DON’T close an account to remove it from your report (it doesn’t work).
• DON’T open too many credit accounts in a short period of time.
• DON’T take too long to shop around for interest rates.

Lenders must pull your credit report every time you apply for credit. If you are shopping around with different lenders for a lower interest rate, there is generally a grace period of about 30 days before your score is affected.

Fix Credit Mistakes
In addition to cleaning up your debts, you also need to check your credit report to make sure it is accurate. This is important: Items that are just plain erroneous can stay on your report for up to 10 years if they are not disputed. By disputing it, you put the wheels in motion to clean up the report and get a better mortgage. Your credit bureau will attempt to get the disputed items deleted from your report by contacting the creditors involved. After 30 days, if the creditors do not respond, the item is deleted from the report. (You can also contact the creditors yourself.)

Even after you reverse the downward spiral of your credit history, you might need to tell a prospective lender that there may be some signs of bad credit in your report. This will save you time, since he will look at different loans than he might otherwise.

Understanding Mortgage Credit Scores
Your credit report is separate from your credit score, though the score is developed from the report. In addition to viewing credit reports from the three major reporting bureaus, you also should obtain your FICO score. Your score is like a report card. Fair Isaac & Co. (the FICO score keeper) assigns you a number based on the information in your credit report. Since there are three credit reporting bureaus, you have three FICO scores. Here are the scoring factors:

Credit Checklist

• Payment history — Have you paid your bills on time?
• Amounts owed — What is your overall debt?
• Length of credit history — How long have you been borrowing money? Lenders like to see a long credit history.
• New credit — Have you applied for new credit?
• Types of credit used — Lenders like to see all kinds of credit types: bank cards, car loans, student loans, and more.

What’s an A+?

The FICO scores range from 350 to 850; an 850 is the Holy Grail of credit scores and 723 is the median score in the U.S., but you can expect good mortgage interest rates at the 720 to 760 level and up.

For anecdotal evidence of your good credit standing, if you notice you are receiving a lot of zero percent credit card or lines of credit offers, you are probably in pretty good shape.

Homebuyers who pursue an FHA loan, one of the most common loan types for first-time purchasers, can usually secure a loan if their credit is 630 or over.

If you are applying for a “stated income” loan, whereby you forego providing income verification to the lender, the lender will be looking for a minimum FICO score of 680 or higher. Banks don’t like to assume all the risk, so your good credit history is key.

Seventy to 80 percent of mortgage lenders use FICO as their means of determining your interest rate and the types of loan you qualify for; as interest rates creep up, this difference can be significant.

Free Reports
The good news is that your credit report is easy to get. A federal regulation that went into effect in September 2005 gives consumers access to one free credit report per year from each of the three reporting bureaus: Equifax, Experian, and TransUnion. The online report is generated after you answer a series of security questions and only takes about 10 minutes to complete.

Your FICO score is in easy reach as well at www.myfico.com. Each FICO score costs approximately $15, but this expense may save you thousands over the life of your mortgage if you end up with a lower interest rate.

What’s a Good Credit Score?
How do you know what a good score is and what a bad score is? Well, that’s sort of a gray area since different scores are calculated in different ways; different creditors use different scores, and no one knows exactly how they are calculated since those formulas are proprietary to the companies using them. Scores may range from around 300 to 900 with the average credit score in America being at about 740. Here is an approximate range of how credit scores are judged:

Excellent credit = 720 and above
Good credit = 660 to 719
Fair credit = 620 to 659
Poor/bad credit = 619 and below

It’s a bit of a misnomer, since Federal Housing Administration (FHA) loans are not loans at all. What they do is insure loans so that lenders can offer mortgage assistance to people who:

• Have fair or poor credit
• Have a low down payment (must have at least 3.5%)
• Have undergone bankruptcy
• Have been foreclosed on

Essentially, the federal government insures loans for FHA-approved lenders so that lenders reduce their risk of loss if they lend to borrowers who could default on their mortgage payments. The FHA program has been in place since the 1930s to help stimulate the housing market by making loans accessible and affordable.

Traditionally, FHA loans have helped military families who return from war, the elderly, handicapped, or lower-income families, but really, anyone can get an FHA loan – they are not just for first-time home buyers.

What are the advantages of an FHA loan?
An FHA loan is the easiest type of real estate mortgage loan to qualify for because it requires a low down payment and you can have less-than-perfect credit. Also, because FHA insures your mortgage, lenders are more willing to provide loans. Another advantage of an FHA loan is its assumable, which means if you want to sell your home, the buyer can “assume” the loan you have.

FHA loans can be used for a home purchase or a refinance.

How do I get an FHA loan?
You can shop anonymously for mortgage rates for an FHA loan online. The process is free, easy and best of all, you are anonymous.

What do I need to qualify for an FHA loan?

• Must have steady employment history or worked for same employer for the last two years.
• Must have valid Social Security number, lawful residency in the U.S., and be of legal age to sign a mortgage in your state.
• Must make a minimum down payment of 3.5% on the house and it can be gifted by a family member (conventional financing does not allow gifting).
• Must have a property appraisal from an FHA-approved appraiser.
• Mortgage payment (including principal, interest, property taxes, property insurance) needs to be less than 31% of your gross monthly income.
• Monthly debt (mortgage, credit cards, auto, student loans, etc.) cannot be more than 43% of your monthly income.
• No minimum requirement for credit scores, but past credit performance will be scrutinized. FHA-qualified lenders will use a case-by-case basis to determine an applicants’ credit worthiness.
• Must be two years out of bankruptcy, with good credit.
• Must be three years out of foreclosure, with good credit.

What are the disadvantages of an FHA loan?
You knew there had to be a catch and here it is: Since an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront -or, it can be financed into the mortgage — and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.

• Upfront mortgage insurance premium (MIP) appropriately named, this is an upfront monthly premium payment, which means borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.75% = $5,250. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage.
• Annual MIP (charged monthly), called an annual premium, this is actually a monthly charge that will be figured into your mortgage payment. It is based on a borrower’s loan-to-value (LTV) ratio and length of loan. There are two different Annual MIP values: 0.50% and 0.55%. If the LTV is less than or equal to 95 percent, a borrower will pay 0.50%. For LTVs above 95 percent, annual premiums will be .55%. Example (for LTV less than 95%): $300,000 loan x 0.5 = $1,500. Then, divide $1,500 by 12 months = $125. Your monthly premium is $125 per month. In most cases, this cost will drop off after five years or when the remaining balance on the loan is 78 percent of the value of the property — whichever is longer.
• Property needs to meet certain standards. Also, an FHA loan requires that a property meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).
• Important note: Prior to Oct. 1, 2008, premiums were figured using a risk-based calculation, taking into account a borrower’s credit score and loan-to-value ratio. However, on Oct. 1, 2008, a one-year moratorium was instituted on this method by the Housing and Economic Recovery Act of 2008. Keep current on the premium costs for FHA loans by visiting the U.S. Department of Housing and Urban Development (HUD).

How large of an FHA loan can I get?
While the FHA does not have income or location restrictions, there are maximum mortgage limits that vary by state and county.
Due to tighter lending standards on conventional loans, FHA loans are becoming increasingly popular. For more information on FHA loans, visit the U.S. Department of Housing and Urban Development (HUD).

Do you Qualify for a “Making Home Affordable” Refinance?
On March 4, 2009, guidelines were released under President Barack Obama’s Making Home Affordable initiative, which is designed to help up to 9 million homeowners stay in their homes through refinanced mortgages or loan modifications.

To qualify, you must:

• Owe between 80-105% of your mortgage. An analysis of Zillow Q4 Real Estate Market Reports shows that 26% of mortgage holders, or 14.8 million homeowners, currently qualify to refinance under these specifications. One quarter (24.6%) of homeowners with mortgages (14 million) do not qualify because they are underwater and owe more than 105% of their home’s value. This is especially true in hard-hit areas of California or Florida, where home values have fallen 40% or more since the peak.
• Have a loan backed by Fannie Mae or Freddie Mac. Approximately 60% of single-family loans are backed by Fannie or Freddie, but a homeowner may not know this about their own loan. If you don’t know, call Fannie at 1-800-7FANNIE and Freddie at 1-800-FREDDIE or submit online forms with Fannie and Freddie.
• Have a conforming loan. That means a loan under $417,000 in many areas or up to $625,500 in high-cost areas like San Francisco, Boston or Washington, DC. Even still, the median home value for the city of San Francisco is $724,244, which says that lots of people have loans higher than the conforming limit. (Note: the conforming loan limit for certain high-cost areas of the U.S. for 2009 mortgage originations is now $729,500.)
• Take this financialstability.gov Q&A to see if you qualify. If you don’t think you qualify for a refinance, you might qualify for a loan modification under the plan.

Refinance Loan Overview
You have an Adjustable Rate Mortgage (ARM) which was doing fine enough that you bragged about it but your loan is going to reset to a higher interest rate amidst market uncertainty and everyone is buzzing about it. Lying awake at night is interfering with your job, so you figure you’d better say goodbye to that low but fluctuating interest rate, and get a nice secure fixed-rate loan before the swing hits the sky.

This is a common scenario these days as interest rates inch up and many homeowners who opted for ARMs in the past 10 years are hoping to switch to a traditional loan.

Switching types of mortgages, as described above, is one reason people refinance, which is simply replacing a current mortgage with another. But there are others.

Reasons to Refinance

• Lower your interest, but keep your term: When rates drop you want to take advantage of it and lower your monthly payments, but keep the length of your mortgage.
• Take care of that balloon payment: You opted for a short-term ARM with a balloon payment and the due date is looming, so you have to come up with a longer-term loan.
• Shorten your term: Lower interest rates (or an increase in your income) mean you can pay down your principal faster.
• Credit rating change: Take advantage of an improved credit rating and get out from under that high rate you had to accept when you bought.
• You need cash: In some cases, you can refinance for an amount more than what you still owe on your home. Lenders limit the Loan to Value at no higher than 70 percent for this type of loan.

How Do I Get Refinance Quotes?
You can shop anonymously for mortgage rates for a refinance online. Just submit a loan request and you will receive custom quotes instantly from a marketplace filled with thousands of lenders. The process is free, easy and best of all, you are anonymous.

• Shop Refinance Loan Quotes
• What is a loan modification

Costs of Refinancing
Most of the fees, appraisals and title insurance that went along with an original mortgage hold true for a refi, which means it can cost a fair amount to change loan types. How quickly you recoup the cost depends partially on how long you are going to keep the mortgage. If you are going to be in your home long enough to recover the costs, and get some benefit from lower interest payments over the life of the loan, then it’s a no-brainer. But balancing the cost with the benefits of a new mortgage is critical.

Be sure to remember that closing costs include another appraisal (no matter how recently you’ve had one), a new credit report, underwriting fees, title insurance, escrow fee, recording fees, and perhaps other small fees. These costs typically range from $1500-$2000. (Some lenders are willing to waive the closing costs for a higher interest rate loan.)

Can You Pay Points on a Refinance?
You can pay points on a refinance loan, same as on an original mortgage, but unlike with the original mortgage, the points are tax deductible over the entire term of the loan rather than just in the first year. Points make sense when rates are on the upswing and you want to get in on the lowest possible rate.

But, except in some cases, points are a fact of life: if you are paying a 1-point fee on a $100,000 refi, you can add $1000 to your closing costs.

You also need to look at your current mortgage to see if there are pre-payment penalties. And what happens to your old mortgage? It’s paid off by the new loan, as are any other liens; at the end of the refinance process, ideally you should have only one loan. (If you have more than one mortgage, however, it’s possible to refinance just one of the loans if the lender agrees.)

When Does Refinancing Make Sense?
The easy way to figure out if refinancing makes sense is to figure out how long it will take you to pay off the closing costs with the savings you realize with lower monthly payments. If it is longer than the time you plan to stay in the house, then refinancing might be a good option. You have fewer tax breaks with a lower-rate refi, so be sure to ask your lender for a refinance break-even table that will take that into account.

Whether it’s called a loan modification, mortgage modification, restructuring, or workout plan, it’s when a borrower who is facing great financial hardship, having difficulty making their mortgage payments and is facing foreclosure, works with their lender to change the terms of their mortgage loan to make it affordable. The workout plan varies by lender, but changes could include temporary or permanent changes to the mortgage rate, term and monthly payment of the loan, the past due amount could be rolled into the loan, and the new balance re-amortized.

What is a loan modification under Obama’s plan?
Under the Homeowner Affordability and Stability Plan President Barack Obama announced on Feb. 18, 2009, the goal of Obama’s “Make Home Affordable” loan modification plan is to reduce the amount struggling homeowners owe per month to sustainable levels. According to plan details:

• The lender would first be responsible for bringing down interest rates so that the borrowers monthly mortgage payment is no more than 38 percent of his or her income.
• Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent.
• Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.
• Borrowers will be put on a trial modification at the new interest rate and payment for three months. If they make all their payments on time, the modification will be implemented at the new rate and be fixed for five years.

Under Obama’s plan, loan modifications will be standardized, with uniform loan modification guidelines used by Fannie and Freddie Mac, and then they will be implemented throughout the entire mortgage industry.

Who is eligible for a loan modification?
To qualify, you must:

• Have originated your mortgage before Jan. 1, 2009.
• Be an owner-occupant.
• Have an unpaid balance that is equal to or less than $729,750 (for a single-family home).
• Have trouble paying your mortgage due to financial hardship.

That could be because you have had an increase in your mortgage payments, or because your income was reduced or you suffered a hardship (like medical problems) that increased your bills, or, you can show that you soon will be unable to make your payments. You will be required to enter an affidavit of financial hardship.

Your monthly mortgage payment must also be more than 31% of your gross (pre-tax) monthly income.
According to the Department of Treasury: Anyone with high combined mortgage debt compared to income or who is underwater (i.e., has a combined mortgage balance higher than the current market value of his house) may be eligible for a loan modification. This initiative will also include borrowers who show other indications of being at risk of default.

Who’s not eligible for a loan modification?
Speculators or those who bought homes for investment purposes — are not eligible. All homes must be owner/occupied. Also, if you cannot afford the home due to job loss or a complete inability to pay, you will not be eligible. Also, mortgages with amounts above the conforming loan limits would not be eligible.

How does someone get a loan modification?
First, gather this information:

• Information about the monthly gross (before tax) income of your household, including recent pay stubs if you receive them or documentation of income you receive from other sources.
• Your most recent income tax return.
• Information about your assets
• Information about any second mortgage on the house.
• Account balances and minimum monthly payments due on all of your credit cards.
• Account balances and monthly payments on all your other debts such as student loans and car loans.
• A letter describing the circumstances that caused your income to be reduced or expenses to be increased (job loss, divorce, illness, etc.).
• Second, call your mortgage servicer and ask to be considered for a “Home Affordable Modification.” The number is on your monthly mortgage bill or coupon book. Honestly state your situation. They will assess your financial state through phone calls and paperwork to determine whether you qualify for a loan modification. Keep copious, detailed notes on who you speak with and details of the conversations so you have documentation down the road if you are faced with foreclosure.

Third, depending on the direness of your financial difficulties, it’s always good to hire legal counsel. Get a referral from your local state bar association.

Fourth, call a local HUD-Approved Housing Counseling Agency for guidance.

Lastly, you can find loan modification reps through Zillow Professional Directory, but you must do your due diligence to make sure these people are legit.

While reverse mortgages can vary, the most popular is a Home Equity Conversion Mortgage (HECM) which is backed by the federal government. Many lenders have software that allows you to compare a HECM with a loan from a private lender.

• A Home Equity Conversion Mortgage is the only reverse mortgage program backed by the federal government via the Federal Housing Administration, which limits loan costs and oversees the lender. Because the loan is insured, the borrower is guaranteed to receive the amount promised regardless of whether the lender defaults, or the home decreases in value.
• These loans are flexible in terms of what you can spend the money on and the amount you can borrow, but they can be expensive. They are by far the most popular reverse mortgages.
• Low-income reverse mortgages are available through state and local governments, but only for specific purposes. Note that all loans are not necessarily available in all locations.
• Deferred Payment Loans (DPL) are low in cost, but limited in scope. For low-income borrowers, they are to be used specifically for repairing your home.
• Property Tax Deferral loans (PTDL) are to be used only to pay property taxes. As with all reverse mortgages, you don’t have to repay the loan as long as you stay in the house.
• A Proprietary Reverse Mortgage from a private lender can often get you more money, but is the most expensive loan. It is generally used by homeowners in a very high-value home. The most common is the Fannie Mae Home Keeper Mortgage.

Rates and Fees
With a traditional mortgage, it’s easy to itemize the costs in terms of interest rate and service fees. But with reverse mortgages, the cost is dependent on such things as what happens to the value of the house during the term of the loan, and the cash advances received.

To give borrowers some idea, lenders are required to disclose the Total Annual Loan Cost (TALC) which does not answer the question definitively, but helps. Borrowers can use the TALC from different lenders to compare mortgages.

One thing stays true: Start-up costs are high, so the longer you stay in the home, the less expensive the loan. You can choose monthly or yearly interest rates, each tied to the Fed Treasury Bill. The best way to estimate the cost is to enter your specific information into a Reverse Mortgage calculator.
In general, fees include:

• Origination fee: A fee charged by a lender that is 2% of the home’s value, or 2% of a county’s limit placed on the value of a house specifically for determining a reverse mortgage amount.
• The amount is negotiable.
• Closing costs: Service fees covering appraisal, surveys, title search, etc. Varies by the value of the house.
• Mortgage Insurance Premium: Guarantees your loan and costs 2% of the value of your home, or of a county’s limit placed on the value of a home, and 0.5% added to the interest rate as the loan increases. This can be high.
• Servicing fee: Administrative fee to the lender, about $35 a month, negotiable.
• Interest rate: Usually adjustable, based on the 1-year Treasury rate, plus a margin. Capped at 2% per year, or 5% over the life of the loan.

Borrower Beware
Reverse Mortgages are complex and hard to understand, therefore may include hidden fees and high overall costs. The AARP site has an entire section devoted to explaining these loans.

Borrowers need to be especially careful on Reverse Mortgages’ downside:

• Cheaper, uninsured reverse mortgages mean the balance is due at the end of the term and the homeowner may have to sell the house to pay off the loan.
• They are expensive; the loan can end up costing the homeowner more than he borrowed.
• A borrower cannot predict the true cost because it is based on how long they live or stay in the house.
• The mortgage could affect government benefits for low income borrowers.
• They can invite scams aimed at seniors, including “estate planning” fees.

Here’s the scenario: You have lived in your home for many years and it is worth more now than it was when you bought it. You are finally retiring, but you’d like to be able to eat more than dog food and that isn’t looking likely. So you borrow against your equity, which is the amount you have invested in your home less the amount you owe on it, and pay your bills out of the new loan while you continue to live in your house.

Many Americans are opting for this type of mortgage so they can stay in their homes in their retirement years.

How it Works
Think of it as the opposite — or reverse! — of more traditional loans: With other types of mortgages, the equity in your home increases as you make monthly payments, and your debt decreases. But with reverse mortgages, a lender gives you cash and the payments are basically taken out of the value of your home.

As the debt increases, the equity in your home decreases. When the loan term is up, the borrower has to pay back the loan, plus interest (usually by selling the house). The loan is limited by the value of the house; a homeowner cannot borrow more than the house is worth, and a lender can never try to get money to cover the loan anywhere other than from the home equity. Borrowers generally wish to receive the payments monthly, or in a lump sum and then a line of credit for further payments.

Who Is it for?
Homeowners 62 or older are the only ones eligible for a reverse mortgage. Since the loan is based on equity in a home, and since there are no monthly payments to make, the homeowner does not need to have an income to qualify. However, the borrower still has to pay home maintenance, taxes, and insurance costs. Most lenders will not lend on mobile homes or apartment co-ops.

This is one time when age can be an advantage: The older a borrower is, the higher the amount they can most likely borrow.

Kind of. Like first mortgage interest payments, home-equity borrowing differs from credit card debt in that you can deduct the interest on your tax return. But this only applies if you itemize your deductions. Also, the tax deduction on interest is limited to loan amounts up to $100,000, with some restrictions.

The Loan to Value and your credit score determine the interest rate of a home equity loan or line. If your credit score is excellent (760+), you may be able to get an interest rate at the prime lending rate, or possibly lower. A good credit score (700-760) will likely get you an interest rate that is about the same as the prime rate. Poor credit will likely result in rates of 1-5 points higher than the prime rate. In some cases, you should be able to avoid fees such as application or appraisal fees, though you might get hit with an annual fee or a small “recording” fee.

Penalties apply for a specific period of time, usually 1 – 3 years after the loan is originated. The amount of penalty varies, but it could be six months of interest or 2 percent of the principal remaining on the loan — nothing to sneeze at.

Some lenders offer very low (and therefore tempting) interest rates in exchange for the borrower’s agreeing to pay a penalty for early payoff. The existence of prepayment penalties is supposed to be disclosed by the lender, but it is worth asking outright if penalties apply to your loan.

Prepayment penalties are more common with non-traditional loans than conforming loans, and often they are aimed at borrowers with bad credit who will agree to them if it’s the only way they can get the loan.

Amortization is a true measure of what a borrower pays annually against a loan. A loan has a life — whether it’s 15 or 30 years. You pay in installments, and the principal decreases (except in the case of interest-only loans, negative amortization and reverse mortgages) until the loan is paid off by the end of the term. The payments are evenly spread over the life of the loan, with the interest payments making up the majority of the payment at the beginning, and then principal paid off toward the end of the term. Pay attention to the amortization schedule, which shows the payments for the life of the loan including interest.

It’s kind of like the old saying, “What you see is what you get.” That’s what a mortgage “rate lock” or “lock-in” guarantees — that you will get the interest rate and points your lender quoted you, even while the loan is being processed.

If you ask him, your lender will lock-in, or commit to, your rate for a specified period of time when you apply for a mortgage. The advantages are obvious: You are protected from any interest rate increases. The downside is that if rates decrease, you are stuck with the higher rate.

The opposite of a rate lock is called “floating.” If you think rates will drop during the mortgage application process, you can take your chances with a float and perhaps end up with a lower mortgage. Of course, the converse is true here, too: If the market pushes rates upwards, you will have a higher mortgage. Even if you opt for a float, ask your lender if you can lock-in at any time during the process period. If rates start to rise, you might be able to lock-in before they rise too much.

If you decide to lock-in an interest rate, here’s what you need to do:

• First, be sure to get the terms in writing. Repeat: Get it in writing!
• Ask the lender for a lock-in form; read it over carefully before you apply.
• Ask your lender how long he thinks the loan processing will take.
• Ask if there is a fee for the lock-in, and how much. Also ask if it applies even if you do not get the loan. (The lender will usually charge higher points for a longer lock.)
• Decide on a lock-in period: Lock-in periods normally are 30-60 days, but they can be as short as seven days. If the lock expires, you will have to pay prevailing rates.
• Find out how quickly the lender can lock your rate; sometimes it takes him a few days and the rates can increase during that time. Locking-in at application time assures you get the rate immediately.

The amount you borrow to actually buy your house is one thing; the fees required to close the transaction are quite another, and they amount to from 3 to 5 percent of your overall mortgage.

At the real estate closing, you will be given paperwork that shows the loan fees. (You should already have seen these in your Good Faith Estimate, but they might vary.) The fees below are what is generally required, but every buyer will not pay every fee listed. For example, maybe you worked a deal with the seller to pick up part of the closing costs. And there are many geographic differences. All lenders do not charge every fee shown.

Commissions: Payment for the work real estate agents have done. Traditionally it is 6% split between buyer and seller agents; usually 3% to buyer’s agent, 3% to seller’s agent. The seller usually pays these. Note: These costs are not included in your lender’s Good Faith Estimate.

General loan fees
Application fee: An application fee is a fee to reimburse the lender for internal costs associated with initiating the application process, usually under $300.

Appraisal fee: The lender hires an independent appraiser to determine whether the property is worth the sales price you’ve offered for it. Expect $200-$500. It can be higher or lower, depending on the size of the property and appraisal fees in your area.

Assumption fee: Buyers sometimes take over (assume) the seller’s existing mortgage. If so, the lender may charge a variable fee.
Credit report fee: Covers obtaining a credit report to determine whether you are an acceptable credit risk. Also called a “credit check fee,” it averages about $25 per credit report checked, although some borrowers have paid three times more.

Interest: Most lenders require the buyer to pay the interest that will accrue on their loan from the date of settlement to the first monthly mortgage payment due date.

Mortgage insurance application fee: When the down payment is less than 20 percent of the purchase price, you are required to carry Private Mortgage Insurance, PMI, to protect the lender should you default on your loan. The lender charges a variable fee to process the application.

Lender’s inspection fee: If you are building a new home or buying a home that’s under construction, the lender may charge an inspection fee, usually under $100. This pays for an inspection by the lender or outside inspector of your house or property.

Lender’s attorney fee: About $400. If a lender involves an attorney in a transaction for any reason, the buyer pays.

Loan origination fee: Fee for establishing a new loan. It is paid to the lender for his or her services in originating the loan. The fee usually varies from 0.5% (half a point) to 2% (two points) of the loan amount.

Loan discount points: Refers to a one-time charge imposed by the lender or mortgage broker to lower the interest rate and therefore the monthly mortgage payment. The more points paid up front, the lower the interest rate. The loan discount is also called “point” or “discount point.” Note that the interest rate does not drop by one percent per point.

Mortgage broker fee: Paid to a mortgage broker, typically in a commission based upon the amount borrowed, in return for finding the mortgage.
Mortgage insurance premium: Some lenders require borrowers to pay their first year’s mortgage insurance premium up front. Other lenders ask for a lump sum insurance premium payment at closing that covers the life of the loan.

Process fee: Charged by the lender to cover costs associated with the processing and closing of a mortgage loan.

Reserve account funds: Your monthly mortgage payments are likely to include a pro-rated amount to cover payments for property taxes and homeowners insurance. This money is held in a “reserve” or “escrow” account by the lender who makes the payments for you. At closing, your lender may require you to pony up advance payments just to be sure the reserve fund has enough money to pay the bills.

Tax-related service fee: Paid to set up a service which identifies the payment due date of local taxes for the servicer of the loan.

Underwriting fee: Covers the final analysis and approval of the mortgage; often the lender’s cost to the investor that will subsequently purchase the loan.

Wire transfer fee: Covers the cost of wiring the money around, which is usually done by escrow.
Insurance and taxes

Annual assessments: If you will have annual assessments made by your condominium or homeowners association, you will have to pay two months’ worth up front.

Flood insurance premium: Lenders may require flood insurance, with the premium paid at closing, depending on the property location.

Homeowners insurance premium: A homeowners insurance policy protects the lender (as well as the owner) against loss of the house from fire, wind, or other natural disasters. Usually the buyer pays some of the premium payment at closing.

Taxes: Buyers pay two months’ worth of city property taxes and two months of county property taxes at closing.
Title charges

Attorney fees: Varies, but could be $500 to $1000 or more. In some parts of the country an attorney, not a title company, handles closing, and sometimes an attorney is hired by the lender to review certain documents.

Notary fees: Pays for the notary public who witnesses that the signatures on closing documents are made by the people named in them.

Title insurance fees: Average is $350, but could be as high as one percent of the loan. Title insurance is a policy that protects the owner and/or lender by guaranteeing the title to the property is clear.

Title search: About $200. A search is done to make sure there aren’t any unpaid mortgages or tax liens on the property.

Government recording and transfer charges
Courier fee: Charged if a courier picks up and delivers documents.

Lead-based paint inspection: Covers the cost of evaluating lead-based paint risk.

Pest inspection: Depending on location, a termite or other pest inspection may be required.

Radon test: Covers the cost of testing for the presence of radon gas, which can be a problem in some parts of the country.

Recording fees: Average about $100. This covers getting the sale recorded in the public record.

Survey: About $1000 for a survey of the property boundaries.

Transfer taxes: This is a fee, usually collected by the state, for transferring the title of the property within a certain jurisdiction. The fee varies.

This process is much more involved, but will provide you with a specific dollar amount that you can afford. Most real estate agents will tell you that getting pre-approved is key to getting the home you want. Lenders and sellers will know you are serious about buying when it’s time to make an offer. And in hot real estate markets, a buyer may need to act fast; if the competing buyer has a pre-approval in hand and you don’t, they win.

Pre-approval is quick and relatively painless. Usually you can get pre-approved within 24 hours with the necessary income verification and supporting paperwork on hand; online sites can pre-approve you immediately, but you’ll have to provide the verification to a lender eventually. And, as with pre-qualification, you are under no obligation to use that lender for the loan (though most buyers will).

What You Need for Pre-approval:

• Pay stubs and W2s (lenders are looking for income verification for two years)
• Two or three months of bank statements
• If you are self-employed, you will need tax returns from the last two years
• Divorce decree (if applicable)
• Loan documents on your current home (if applicable)
• Many lenders and brokers will ask you to pay for the credit report required for preapproval, but this is generally the only fee you will encounter during pre-approval (sometimes, though, a lender will charge a fee; be sure to ask if it’s free)

“It depends” is as close as you will come to the right answer to answer to this question. For example, the length of time you intend to spend in your new house has a huge bearing on what type of loan you agree to. But whatever your situation, you need to understand the various types of interest rates so you won’t be blindsided by those monthly payments. (For information on specific mortgage types, see Understanding Types of Mortgages and Home Loans.)

Common interest rates include:

Fixed rate: The monthly payment does not change over the life of the loan in a fixed rate mortgage. For example, if you have a 30-year loan, it will be paid in full after 360 fixed monthly payments. Your payments will not fluctuate.

Adjustable rate: An Adjustable Rate Mortgage (ARM) uses an interest rate that fluctuates with an indexed rate plus a set margin; therefore the monthly payment may increase or decrease over the life of the loan.

Hybrid ARM: Hybrid ARMs have set adjustment periods, which means the interest rate changes on a predetermined schedule. For example:

• 3/1 year: Monthly payment remains fixed for 3 years and then adjusts every year thereafter
• 5/1 year: Monthly payment remains fixed for 5 years and then adjusts every year thereafter
• 7/1 year: Monthly payment remains fixed for 7 years and then adjusts every year thereafter

Flexible option ARM: The interest rate in a flexible ARM is calculated daily and changes with each monthly payment. There is a change cap limiting how much the payments can change within a year. The borrowers choose from a menu of options to pay what they want monthly.

Interest-only: For a period of time, usually 5 or 10 years, monthly payments cover only the interest on the loan. After that period, the monthly payment adjusts to include paying back the principal as well. As many borrowers can testify, the danger with this type of loan is that the property becomes devalued during the interest-only period and the owner owes more on principal than the house is worth.

Capped rate: In this type of mortgage, a lender guarantees the interest rate will never rise above a set amount for a period of time, so there is a certain amount of security for the borrower. The good news for the borrower is that if the rate decreases during that period, so do the payments.

Traditionally, lenders like a down payment that is 20 percent of the value of the home. However, there are mortgages that require less.

Beware, though: If you are putting less down, your lender will scrutinize you even more.

Why? Because the less you have invested in the home, the less you have to lose by just walking away from the loan. If you cannot put 20 percent down, your lender will require private mortgage insurance (PMI) to protect himself from losses. (However, if you can only afford, for example, 5 percent down, but have good credit, you can still get a loan, and even avoid paying PMI. Ask your lender about an 80/15/5 loan — an 80 percent first mortgage, followed by a 15 percent second mortgage, and 5 percent down. This gives the lender more security, while saving you the cost of insurance.)

The complex process of getting a mortgage is made clearer by breaking it down into steps.
Here’s a checklist to help do just that.

1. Determine your mortgage limit
   • Create your expense snapshot — listing all expenses in your current budget
   • Estimate potential homeowner expenses and include them in your snapshot
   • Estimate your monthly payments using an online calculator
   • Calculate your debt-to-income ratio to determine your mortgage limit
   • Decide how you will make a down payment and how much
2. Check your credit
3. Determine the type of loan that is best for you.
4. Choose a lender, or several.
5. Get pre-approved. You’ll need the following information when applying:
   • Paycheck stubs for the last 30 days
   • One W-2 tax return if you’ve had your job for over two years, or two if otherwise
   • Recent credit card statements
   • Two bank statements over the last 90 days
   • Proof of pensions, retirement, disability, or Social Security
   • Proof of income from rentals, investments, etc.
   • Proof of child support or alimony paid/received
   • Loan information on current home (if you own one)
   • 401K statements
   • Divorce decree (if applicable)Get a Good Faith Estimate of fees as a part of your pre-approval.
6. Lock in your rates.
7. Bring all documentation to the closing.

• Are you licensed in the state?
• Whom do you represent (e.g., a bank, broker, finance company)?
• What are your loan programs? Do you offer VA loans (for example)?
• What is the par rate (the actual rate for a particular loan) for a 30-yr. fixed loan? (He should have the answer at the tip of his tongue.)
• Can you estimate and explain your fees?
• Would you get approval for my loan locally?
• Are you going to hold this loan or sell it?
• Can I see a Good Faith Estimate?

Additional questions for online lenders:

• Is there someone I can talk to whenever I need to?
• How are you keeping my info secure?
• Do you sell my information?

• To quote a mortgage broker: “There is a different loan for a different need.” In other words, the type of mortgage you get depends on the situation. A good lender will get a sense of your needs from your credit report, your assets, and your employment history. He can then recommend some options for you. Here’s the gist on the most common loans.

  Fixed-Rate Mortgage
  Description: Interest is fixed for an amount of time; e.g., 10, 15, 20, 30, or even 40 years, at which point the amortized principal is paid in full.

  Pros: Security. You know what your payments will be. You can refinance if rates drop tremendously.

  Cons: If rates go down, you’ll still be paying the initial rate unless you refinance.
  If you are keeping your home for 15 or even 30 years, it’s a conservative way to go. But you can end up paying more short-term than if you had an ARM.

  Adjustable-Rate Mortgages (ARMs)
  Description: The interest rate fluctuates with an indexed rate plus a set margin; adjustment intervals are predetermined. Minimum and maximum rate caps limit the size of the adjustment.

  Pros: Initial rates are lower than fixed. These work well with those who aren’t expecting to stay in a home for long time, or in a market where houses appreciate rapidly or for those wanting to refinance. You can qualify for a higher loan amount with an ARM (due to the lower initial interest rate).

  Cons: Always assume that the rates will increase after the adjustment period on an ARM. You are betting that you’ll save enough initially to offset the future rate increase.

  Check out the frequency of the adjustments. The more often, the lower the starting rate, but the more uncertainty. The less often, the higher the rate, but a little more security. Check the payments at the upper limit of your cap (your rate can increase by as much as 6 percent!); you can get burned if you can’t afford the highest possible rate.

  1-yr. Treasury ARM
  Description: The rate is fixed for a year, and then becomes adjustable each year. The new rate is determined by the treasury average index plus the loan margin (usually 2.25-2.5%).

  Pros: Lower rates than a fixed mortgage. When rates go down, you benefit.

  Cons: Watch the margin; the margin is added to the index to come up with the new rate after the adjustment period. When rates are going up, you could end up paying more interest than with a fixed.

  Watch out: If you are a gambler and think the rates won’t increase, this might work for you. But if you are into it for the long or even intermediate run, fluctuating interest rates can mean higher payments over time.

  Intermediate ARM
  Description: With an intermediate or hybrid ARM, the rate is fixed for a period of time, and then adjusts on a preset schedule. This is shown by the number of years the loan is fixed, and the adjustment interval (e.g., 3/1 ARM is 3-year fixed, and 1 adjustable annually). The new rate is determined by an economic index (usually treasury or treasury average index) plus the loan margin (usually 2.25-2.5%).

  Pros: Lower rates than a fixed mortgage. When interest rates rise, you see more ARMs because they are easier to qualify for.

  Cons: When rates are going up, you could end up paying more interest than a fixed-rate mortgage after the initial period.

  Watch out: If you aren’t planning to keep your house for long, this might work for you because you will receive lower rates initially. Be sure to check the rate caps so you know exactly how high your payments can go. Fluctuating interest rates can mean higher payments over time.

  Flexible payment option ARM
  Description: The borrower chooses from different payment methods every month. There is a “change cap” limiting how much payments can fluctuate in one year.

  Pros: Frees up cash when you need it. Good for buyers with variable incomes (e.g., salespeople who work on commission).

  Cons: Some options won’t cover your interest. With lower payments, your balance increases each month, and eventually your payments will increase substantially. This could lead to negative amortization.

  Watch out: Eventually you will be required to pay down the principal and your payments will increase drastically. If you can’t make them, you lose the house. Most experts say, “Don’t do it.”

  Interest-only ARM
  Description: For a period of time, you pay only interest, and do not pay down the principal.

  Pros: If you don’t plan to stay in a home long, you can buy something you ordinarily couldn’t afford. If you are in a hot market, or a hot neighborhood, you’ll have low payments while your house appreciates in value. You can always pay more on the principal while enjoying the low payments.

  Cons: The day will come when you need to pay down the principal. If your home value has fallen, or your income decreased, you could have trouble making the new payments.

  Watch out: If you can’t pay interest and principal at the same time, chances are you can’t afford the house. You can only put off the inevitable for so long. The principal has to be paid down. If you can’t make payments, you could lose the house. If you plan to sell your house and can’t sell it for what you owe, you are in trouble.

  Convertible ARM
  Description: An ARM that can be converted to fixed rate after a period of time.

  Pros: Saves on refinance costs, assuming you would have been switching anyway.

  Cons: You will have a higher rate for the fixed with a convertible loan. You can’t look around for a better deal, which you can with a refi.

  Watch out: Saving the cost of the loan and the hassle of shopping loans are a plus, but you might be crying if the refinance rates are lower than your new fixed. Experts say, “Just refinance.”

  Jumbo loans
  Description: Above Freddie Mac and Fannie Mae conforming guidelines, therefore the big secondary lenders will not secure jumbo loans. 2006 maximum amount for a conforming loan: $417,000.

  Pros: When the market is out of sight, the jumbo loans make a purchase possible.

  Cons: Higher down payments, and higher interest rates.

  Watch out: If you can afford the higher payments, then go for it. But make sure you can afford them.

  Assumable mortgage
  Description: An adjustable-rate loan, the balance of which can be assumed by a home buyer.

  Pros: Sellers can offer a low interest rate to entice buyers.

  Cons: This is almost never a fixed rate mortgage, so the savings might not be all that great.

  Watch out: These are rare today. If the buyer who assumes the loan defaults, the bank will go after the original borrower.

  Balloon conforming mortgage
  Description: Interest rate is fixed for a period of time, but the principal is not totally amortized. For the remainder of the term, it adjusts to a new fixed rate determined by the Fannie Mae net yield index plus the margin.

  Pros: Lower monthly payments initially. If your career (and salary) has a good future, or you are in a hot market and plan to sell before the balloon comes due, you can save moolah.

  Cons: Who knows what that new rate will be? There’s a looming debt in your future.

  Watch out: You can refinance when the balloon comes due, but you are gambling that you can afford the refi loan.

  Balloon mortgage
  Description: The rate is fixed for a period of time, but the principal is not completely amortized during the period. The entire balance of the principal is due as a balloon payment at the end of that period.

  Pros: Lower monthly payments, with the idea you can always refi or sell before the balloon.

  Cons: A big elephant waiting in the wings.

  Watch out: It’s easy to procrastinate, or if your life changes, and then your balloon pops. Refi costs might offset any savings you made.

  Veteran Administration Loans
  Description: A zero-down loan offered to veterans only, the VA guarantees the loan for lenders.

  Pros: Nothing down, and no mortgage insurance. The loan is assumable.

  Cons: It’s possible the rate is more than conventional loans or FHA loans.

  Watch out: Shop around first. Lenders are getting paid a 2 percent service fee by the government, so your points should reflect a discount when compared to similar rate loans.

  Federal Housing Administration Loans (FHA)
  Description: Government-subsidized loan with low down payment (i.e., as little as 1-3%) and closing fees included; the government guarantees the loan.

  Pros: Low rates for those who can’t come up with the down payment or have less-than-perfect credit; great for first-time homebuyers. The loan is assumable.

  Cons: If you can afford 5 percent down, you might find better rates with conventional loans

  Watch out: Shop around first. Lenders are getting paid a 2 percent service fee by the government, so your points should reflect a discount when compared to similar rate loans.

  Reverse Mortgage
  Description: A loan to elderly homeowners who need to borrow against the equity of a home while still living in it. The debt does not need to be repaid until the house changes hands. Interest is commonly one-year treasury rate, plus a margin and a cap on a rate change.

  Pros: Allows people 62 or older to stay in their homes as they age; no repayments.

  Cons: You must maintain your house, pay property tax, and insurance. And you cannot take out a second mortgage or rent your home, or use it for business.

  Watch out: The loans are complex, so make sure you understand what you are getting. AARP has good consumer-oriented explanations for seniors.
  Choose a lender who is member of the National Reverse Mortgage Lenders Association.