Home Mortgage Information: FAQs

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All homeowners who do not itemize their income taxes can deduct between $500 and $1,000 from their 2008 federal taxes. Anyone buying a first home between April 9, 2008, and July 1, 2009, will receive up to $7,500 in federal income tax credits. The bill includes an estimated $15 billion in housing tax breaks.

Homeowners struggling to make payments on high-interest mortgages can contact their banks and transform their loans into government-backed, 30-year fixed-rate mortgages. To qualify, homeowners must have a mortgage debt-to-income ratio greater than 31 percent. To see if you qualify: Multiply your gross monthly salary by 31 percent. A homeowner earning $75,000 a year, for example, must owe a monthly mortgage payments of at least $1,938.

The new loan cannot exceed 90 percent of the home's value and borrowers must prove they can repay the loan.

Congressional budget analysts project that this $300 billion program would help 400,000 homeowners facing possible foreclosure. The program begins in October but officials recommend homeowners begin the process now.

Homeowners living in neighborhoods stricken by foreclosures, where vacant properties were left run down with overgrown yards, may see improvements. The bill provides $3.9 billion in grants for governments in the hardest-hit communities to buy and fix up already-foreclosed property at a discount.

First-time buyers or homeowners with subprime mortgages in some states can qualify for low-interest loans or refinancing under a provision allowing states to offer an additional $11 billion in tax-free municipal bonds to pay for such housing projects. The actual dollar amount and the criteria for who might qualify will vary by state.

Homeowners strapped for cash will be able to receive preforeclosure financial counseling and legal services. The bill allocated $180 million for these services.

A new fund, paid for with profits from the mortgage companies Fannie Mae and Freddie Mac, will help build affordable rental housing. The two companies will be allowed to buy pricier mortgages, up to $625,000, which would make stable loans available to buyers in expensive cities. Also, Fannie Mae and Freddie Mac will be subjected to greater government oversight. Regulators will have authority to approve pay packages for company executives.

A pre-qualification is normally issued by a loan officer who will determine the dollar amount of a loan you may be eligible to receive. It is not an approval nor is it a commitment to make you a loan. Conversely, a pre-approval involves actually verifying your credit, income, down payment, etc. so that your loan request may be presented to an underwriter for a credit decision. Once you find a house, having a pre-approval letter allows you to close more quickly since much of the work on the mortgage loan has been completed.

Well, that is a very interesting question. While most people initially thought the mortgage mess due to the "subprime" market would be contained strictly to a small segment of the housing industry and the related foreclosures, it has now become evident that the effects are being felt across our entire economy. So much of our economy is driven by perception of the consumer, and if people are worried about whether their house might go down in value, that uncertainness may keep them from making big-ticket purchases such as automobiles, vacations, etc. And, with a general tightening of access to credit, it has become harder to purchase an item, or even get a credit card, due to higher standards for minimum credit scores in all areas.

Recently, I'm sure you've read about the sub-prime mess, mortgage companies going out of business, and many other alarmist type headlines. Well, I'll try to briefly explain what has happened. First of all, many loans were made over the last few years that probably shouldn't have been, and these marginal borrowers are now in big trouble with not being able to pay their mortgage payments. This, along with deflation in property values in many areas of the country, has led to a huge increase in foreclosures (and, I personally believe this will get worse before it gets better). This has caused lenders everywhere to have a kneejerk reaction and to become radically cautious in their lending, to the point of where many, many borrowers who could get financing even a few months ago now cannot. This paranoia on the lender's part has also spilled over somewhat into borrowers with good credit. A particularly hard hit market is the "jumbo" market, which is for loans over $417,000. Lenders have become very skittish on these loans, and rates have gone up tremendously. However, for most "A" credit borrowers who can document income and have good credit, loans should be available just as before.

Over the last two years or so, many vacation homes have seen a reasonably drastic depreciation in value, particularly in the coastal areas of the U.S. Many experts feel that this depreciation is close to the bottom, but not quite there yet. So, be careful before buying! However, an area that has held up well in value is lake homes. With the destruction by hurricanes in the Gulf and skittishness towards purchasing at the beach and some of the other resort areas, many lakes around the U.S. have continued to enjoy price appreciation.

Recently, the past few years caught up with the mortgage industry, particularly in the area of higher credit risk borrowers. It had gotten to the point where almost anyone breathing, no matter what the credit score or credit risk, could get a mortgage loan. Most of these were done on some sort of A.R.M., and when the first adjustment rolled around after a couple of years, defaults started soaring, lenders started rethinking their policies, people started panicking.... This caused most of these high risk lenders to go out of business overnight, leaving many other people holding the bag and many borrowers who could have gotten mortgage financing three months ago unable to find financing. Basically, the whole subprime mortgage industry stopped on a dime. We believe it may get worse before it gets better, but that it will get better at some point as the lending industry is all about making loans.

Each individual has a credit score. This score reflects the level of risk associated with lending to that individual. Scores range from 400-800, with higher being better. Negatively affecting your score are things such as late payments, judgments or collections, heavy use of credit, high ratio of actual credit to available credit, and inquiries into your credit. Credit score plays a significant role in determining your ability to get a mortgage loan. Click here to learn more about your credit score.

Basically, three or more homes that are similar to the subject property (these are called "comparables") that have sold recently in the proximity to the subject are adjusted based on differences in square footage, amenities, etc. to arrive at an adjusted sales price for each comparable. Then, these are averaged, and an appraised value is determined for the subject property. This method is called the "sales comparison approach." Additionally, the appraiser might provide an estimate of value based on the cost to rebuild the home. This is called the "cost approach." Typically, the sales comparison approach provides the most accurate estimate of a true market value.

Congress recently passed legislation that allows mortgage insurance premiums to be tax-deductible on purchase and refinance loans closed on or after January 1, 2007. Borrowers with household adjusted gross income of $100,000 or less purchasing a home in 2007 or after will be able to deduct the full cost of the mortgage insurance they pay. This tax law change will make it necessary to rethink the very popular "piggyback" loans which have been used in recent years to avoid paying PMI. Your mortgage loan specialist here at Aliant Bank, a division of USAmeriBank, can help you make an informed decision.

An escrow account is set up at closing to pay your homeowners insurance and property taxes. You will pay 1/12 of your annual tax and insurance bill in your monthly payment, and then your lender will pay these for you on an annual basis.

Rates don't necessarily change every day, but they can. As a matter of fact, they actually can change multiple times in a day. These changes are based on a variety of factors, but mainly will correlate to changes in the bond market due to breaking financial news, world events, stock market movement, etc.

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PMI stands for private mortgage insurance, and is required if your first mortgage is more than 80% of your purchase price/value. You will be required to pay a PMI premium which will be included in your monthly payment.

Closing costs consist of items required to process the closing portion of your loan i.e. attorney fees, title fees, origination fees, appraisal fees, etc. Prepaids are one year of homeowner's insurance, prorated property taxes, and interest from the day you close until the end of the month. Please talk to one of our mortgage loan specialists about detailed amounts.

APR stands for annual percentage rate. Simply put, APR is the effective rate you will pay on your mortgage loan based on the interest rate and related closing costs. It will almost always be higher than the interest rate on your loan, because it factors in your "cost to obtain the credit" ... i.e. your closing costs. Please note, however, that your payment is based on your simple interest rate, not APR.

An A.R.M. is a mortgage loan that is fixed for a period of time, typically 3-7 years, and then adjusts each year thereafter. For instance, a 5/1 A.R.M. is fixed for 5 years, and then adjusts each year after the 5 year period. The benefit of an A.R.M. is that you typically will get a lower initial rate than on a fixed rate product such as a 30 or 15 year loan. However, you must consider that you will have a loan whose payment and interest rate can change.

Locking a rate means that you and your lender come to an agreement on product and rate, and the lender guarantees that rate for a specific period of time, subject to you qualifying for that loan. Lock periods range from 15 days to 1 year, and the rate will be higher the longer you lock it for ( ie. a rate locked for 1 year is typically .5% higher than a 15 day lock). You can "float" your rate in hopes of a better rate, but obviously you will be taking the chance of rates going up before you lock.

A point is 1% of the loan amount, and is a cost associated with closing. If you have a $100,000 loan, a point is $1,000. Also, an origination fee also typically is 1% of the loan amount. Points are used to "buy down" or lower your interest. Essentially, you are paying a fee upfront (a point or points) in order to get a lower long term interest rate.

An appraisal is a 3rd party determination of the value of the property you are purchasing or refinancing. Typically, the appraiser will find similar houses in close proximity that have sold, make adjustments based on differences in square footage and amenities, and from that determine the value of the subject property.

Title insurance is required on every mortgage loan, and insures to both the lender and the borrower that they have "clear title" to the property. This means that the records have been checked and it has been determined that there are no outstanding liens against the property which would affect ownership rights (title) in the property. Examples of items that could cloud title and which title insurance covers include old tax liens from previous owners, judgments against the original builder from unpaid subcontractors, and liens placed by municipalities for unpaid utility bills.

A flood certification determines whether a property is located in a flood zone and whether flood insurance is required by the Flood Disaster Protection Act.

Your monthly payment includes principle, interest, taxes, homeowners insurance, and private mortgage insurance if applicable.

Fannie Mae is the Federal National Mortgage Association. Freddie Mac is the Federal Home Loan Mortgage Corporation. They are government-sponsored agencies that purchase conventional mortgages in the secondary market.

A reverse mortgage is a financial tool that lets you tap into the equity you have built in your home. These loans allow you to receive cash for the things you need or want, while still living in and owning your home. A reverse mortgage is the opposite of a regular, or forward, mortgage. A reverse mortgage allows you to get cash or increase your monthly income by taking on debt and reducing the equity in your home. A Reverse Mortgage makes sense for the homeowner (62 or older) with good equity in his home but less monthly income or less savings than he is comfortable with. If he wants to stay in his home, tapping the equity with a Reverse Mortgage may give him the dollars he needs to help him do so. With a reverse mortgage, the borrower actually may receive a check each month, rather than making a payment each month!

The primary benefits of a VA mortgage are typically there are no down payment requirements, the closing costs and interest rates are comparable to typical mortgage loans, there are no mortgage insurance premiums, and the veteran can prepay the mortgage without penalty.

Home Mortgage FAQs