When it comes to your mortgage, you probably have a lot of questions. You're not alone! Here are some of the questions that we are frequently asked. But if your question isn't answered here, I'm always available to help.
General
What is the difference between an appraisal and a home inspection?
Lenders are required to obtain an appraisal on the home being purchased or refinanced to determine that the value is sufficient to support the loan being made. The loan to value will be based on the lesser of the sales price or appraised value. For example, if a home is being purchased for $100,000 with an 80% loan and the home appraises for $95,000, then the loan amount will be $76,000 if the 80% loan to value is maintained. An appraiser will determine the value based on comparable sales in the market. A home inspection is not required by lenders unless the appraisal indicates the need for one. However, most buyers do a home inspection on their own. The home inspection helps warrant the condition of the property and confirms if there are any issues with things like flooring, structure, electricity, plumbing, roofing, etc… There is also a great video on my website explaining the difference between an appraisal and a home inspection.
Are gift funds an acceptable source of funds for closing?
For almost all loan types, a gift is an acceptable source of paying down payment and closing cost. The gift has to be properly documented, which includes a gift letter being signed and proof funds were transferred from the donor to the borrower. We will provide more specific documentation and instructions when a gift is involved.
What determines someone to be self-employed?
When income is earned that is not W-2 in nature, it is typically from self-employment. Most of the time, the income that is used for qualifying a self-employed borrower is based off of the two most recent tax returns (averaged). If the borrower is a business owner, then two years of business tax returns will be required as well.
Process
When do I need to pay for an appraisal?
Most lenders require that you pay for your appraisal when you go under contract to purchase. We don't charge for the appraisal until closing. So the money will be collected with the closing check.
What is title insurance and who pays for that?
Title insurance is basically an insurance coverage for both the lender and the borrower that any liens that exist prior to the purchase date will not be the responsibility of the lender or the buyer. The sales contract will dictate who is responsible for paying for the title insurance. On a refinance, the title insurance will be the responsibility of the borrower. Most of the time, on a refinance, a re-issue credit will be available to offset some of the cost.
What is mortgage insurance?
Mortgage insurance is basically an insurance that protects the lender against default. It is required when the loan to value exceeds 80%. In other words the amount borrowed is more than 80% of the sales price. There is a video on my website that explains this more thoroughly.
What are transfer taxes?
For each purchase, there are two transfer taxes. One is on the transfer of the deed of the property and the other is applied to the new loan obtained. Both are set at a specific rate and paid to the state.
What is the difference between homeowners insurance and mortgage insurance? And what is hazard insurance? And who is responsible for obtaining this?
Hazard insurance and homeowners insurance are one and the same. Homeowners insurance protects the home against disasters - things like fire, storm damage, and theft. Mortgage insurance is a protection for the lender against default of the loan. The lender will obtain mortgage insurance when it is needed, and the buyer pays for it. The buyer is responsible for obtaining his or her own homeowners insurance.
How do escrows work?
There are three main components to setting up an escrow account. The first is the prepaid interest, the second is the escrow for homeowners insurance and the third is the escrow for taxes.
You're required to pay interest for the number of days between your closing date and the end of the month. That figure is a simple calculation of the loan amount divided by 365 days, multiplied times the number of days between your closing date and the end of the month. In this case, you will skip a month's payment before your first payment will be due. Because your typical payment includes the interest of the prior month. There are certain circumstances where the interest is not paid at closing. This can happen when you close in the first five business days of the month. In that scenario, your first mortgage payment is due the first of the following month and you pay no prepaid interest.
For homeowners insurance, you pay the first year’s premium at closing. We also collect a couple of months extra to buffer the escrow account. During the first year you will make 12 payments that are the equivalent of 1/12 of the annual homeowner’s insurance premium. So at the end of year one, the initial insurance premium is used up, but a new payment is ready to be made from the amount collected in the escrow account.
Unlike insurance, taxes are paid in arrears. On a purchase loan, we will collect four months of taxes upfront for the escrow account. You will get a credit from the seller for the taxes due from the first of the year until the closing date. So at the end of the year, the escrow account will have the funds necessary to pay the taxes for that given year. On a refinance, you are responsible for the taxes due in the given year of closing and will put in escrow the amount needed to complement whatever will be paid into escrow the remainder of the year to equal the amount due by the end of the year.
When can I lock in my interest rate?
We can lock your interest-rate in once you have a contract to purchase. Interest rates have to be locked for a certain number of days and are tied to a specific property and its closing date. The shorter the period needed for the rate lock, the better the rate will be. This may only be fractional, but the shorter the term of the rate lock, the less risk is involved for the lender, thus the pricing will be better.
Closing
Who is my closing check made out to?
The funds due at closing are paid to the closing attorney. For most transactions where the funds needed exceed $5000, the attorney will require the funds to be wired. Wiring instructions to the attorneys account will be provided at least a week prior to closing. The attorney will disperse funds to all appropriate parties.
Who do I make my mortgage payment to?
We are a correspondent lender. That basically means that we process, underwrite and close the loan in our name. Once the loan is closed, we will sell the loan to an investor who will service the loan on your behalf.
What am I required to pay at closing?
The cost at closing is broken down into three categories. The first is the down payment. That is simply the difference between the loan amount and the purchase price of the property. The second part is the closing costs. Those are the fees paid to the lender and third parties to perform the services necessary to complete the transaction. The third component is the prepaid expense. That is the cost of setting up the escrow account and paying the interest due for the month. In most transactions, the seller can pay the buyers closing cost and prepaid items if it were negotiated that way in the contract. The down payment will always be the borrower’s responsibility.
When is my first payment due?
In most cases a month is skipped before the first payment is due. So for example, if the closing is taking place on June 20, the first payment will be due August 1. The one exception to that is when a closing occurs during the first five business days of the month and the buyer chooses to pay no prepaid interest. In that case the first payment is due on the first of the next month.
When is my payment considered late?
Payments are due on the first of the month, but not considered late until after the 15th of the month.