Why use a Mortgage Broker?
The answer is simple – to SAVE TIME and MONEY! With tremendous
competition in today’s marketplace for your business, mortgage
brokers continue to be the preferred provider for home loans. In
2005, mortgage brokers originated over 70% of all residential
mortgages. This clearly indicates consumers are choosing superior
options, convenience, service and expertise offered by mortgage
The mortgage broker is an expert mentor who guides the consumer
through the complex mortgage lending process. The broker offers the
consumer extensive choices and access to affordable home loans while
balancing the consumer’s financial interests and goals.
Consumers could conceivably shop around to many financial
institutions, but that can be time consuming and very confusing.
Most people are either too busy or are overwhelmed by the process.
The broker works as a liaison between the borrower and the lender to
create a cost effective and efficient loan process. Brokers bring
financial institutions to the consumer. The borrower doesn’t have to
spend time and energy visiting websites, playing phone tag with
multiple loan officers, and trying to compare loan options with
different rates, points, closing costs and terminology. The borrower
is approved with one application, instead of having to qualify a
dozen times by shopping themselves.
Unlike direct lenders, brokers are not limited to one set of loan
programs. Individual lenders offer only a fraction of the programs
that might be beneficial to the consumer. Mortgage brokers shop the
market and direct consumers to lenders who have the loan products
that best meet their needs. Brokers deal with multiple lenders ( 40
on average ) and are able to select the lender with the best rates
and programs for any given loan scenario. The lender with the lowest
on a 30 year fixed loan probably doesn’t have the best rate on a 5/1
Interest Only ARM. A savvy broker provides great flexibility and
choice to the borrower.
Interest rates change daily. The lender with the best rate today may
not have the best rate two weeks from now. Brokers can cancel a rate
lock with a lender and relock with another to capture a lower rate
if the market shifts. Sometimes, the best deal may not always equal
the lowest rate. A loan with a very low rate may not be the best
choice for a consumer with limited cash, if that rate comes with
high points and fees. The best deal for any consumer depends on his
financial circumstances, needs and goals.
While rates are an important consideration in selecting a lender,
brokers also make their professional recommendations based on a
lenders reputation for service, their underwriting criteria, their
ability to fund a loan on time, and their compliance with the
consumer’s requirements. If problems arise in underwriting that
cannot be satisfied, the mortgage broker can take the deal to a
different lender and get the loan closed on
Often, direct lenders have limiting criteria with no ability to be
creative to qualify the consumer. Mortgage brokers are responsive
and have pioneered the subprime credit market, using innovative loan
programs to approve borrowers with less than perfect credit
histories. Many would not have been able to enjoy homeownership
without the assistance and dedication of a mortgage broker.
In conclusion, consumers demand choice, convenience, and expertise.
Mortgage brokers deliver. By continuing to provide individualized
attention and sound advice tailored to the borrower’s needs and
wants, mortgage brokers can expect increased market share.
What Should I know about
the Loan Application Process?
The mortgage application process requires considerable paperwork.
First there is the application form, which asks for detailed
information about you, your employment record, the house you want to
purchase, etc. The lender will need documentation pertaining to your
personal finances--your earnings, your monthly expenses, and your
debts--to help gauge your willingness and ability to repay the
Lenders also will examine your file at the credit bureau to learn if
you pay your bills on time. A lender may reject your application if
the report shows that you have a poor credit history. Thus, you may
want to make sure your credit file is accurate before you apply for
your mortgage. You have a right to know what information is
contained in your credit report and to have someone from the credit
bureau help you understand what the report says. The names of credit
bureaus can be found in the phone book.
Escrow : How Does it Work?
The principals to the escrow : buyer, seller, lender, borrower :
cause escrow instructions, most usually in writing, to be created,
signed and delivered to the escrow officer. If a broker is involved,
he will normally provide the escrow officer with the information
necessary for the preparation of your escrow instructions and
The escrow officer will process the escrow, in accordance with the
escrow instructions, and when all conditions required in the escrow
can be met or achieved, the escrow will be "closed." Each escrow,
although following a similar pattern, will be different in some
respects, as it deals with your property and the transaction at
The duties of an escrow holder include; following the instructions
given by the principals and parties to the transaction in a timely
manner; handling the funds and/or documents in accordance with the
instruction; paying all bills as authorized; responding to
authorized requests from the principals; closing the escrow only
when all terms funds in accordance with instructions and provide an
accounting for same : the Closing or Settlement Statement.
Why do I need an Appraisal?
Because much private, corporate, and public wealth lies in real
estate, the determination of its value is essential to the economic
well-being of society. It is the job of the professional appraiser
to determine these values by gathering, analyzing, and applying
information pertinent to a property.
Unquestionably, the professional opinion of the appraiser, backed by
extensive training and knowledge, influences the decisions of people
who own, manage, sell, purchase, invest in, and lend money on the
security of real estate. And because the appraiser is trained to be
an impartial third party in the lending process, this professional
serves as a vital "check in the system," protecting real estate
buyers from overpaying for property as well as lenders from over
lending to buyers.
Many states require all real estate appraisers to be, at a minimum,
state licensed or state certified and have fulfilled rigorous
education and experience requirements and must adhere to strict
industry standards and a professional code of ethics as promulgated
by the Appraisal Foundation. To see the specific requirements for
any state click here.
How long does an appraisal take?
The physical inspection of the real property being appraised can
take from approximately fifteen minutes to several hours, depending
upon the size and comlexity involved.
After the initial inspection of the property the appraiser spends
time touring through the neighborhood or area. The purpose of this
tour is to search for comparable sales (other properties that are
similar to the property being appraised) that have sold within the
last six months to a year or so. When the field work is finished,
the appraiser completes the report at his office. The report can
consist of a short form report (typically under ten pages) to a long
narrative report which can sometimes exceed a hundred pages. A short
form report usually takes between three to six hours to complete. A
narrative report can take weeks or sometimes even months, depending
upon the complexity of the assignment.
Where does an appraiser get the information needed to complete an
The appraiser gets his or her information from a wide variety of
sources, including the local Multiple Listing Service, local tax
assessors records, local real estate professionals, county
courthouse records, private public record data vendors, interviews
with sellers and buyers, appraisal data co-operatives and his or her
own personal knowledge or office files from previous appraisals. The
quality and reliability of each piece of information is considered
by the appraiser.
Appraisal VS. Engineer or Whole House Inspection?
The appraiser is not a whole house inspector, engineer, architect,
electrician, plumber, H.V.A.C. technician or contractor. The
appraiser briefly walks through the house to get an idea of the
general condition and room count. An appraisal is not a guarantee of
condition. The appraiser will ask about any visible problems and
those which may not be visible, and will do his/her best to gauge
any impact on value attributable to those problems. You are
encouraged to seek the advice of experts if you have any questions
about the structural or mechanical aspects.
What does the appraiser look for?
Typically, an appraiser needs to document the condition
property, both inside and out, from the layout and features to
degree of modernization including any updates as well as the overall
quality of construction. This information will help to assist the
appraiser throughout the valuation and comparison process.
The appraiser estimates the square footage (GLA - gross living
area), by measuring the exterior of the home. Non-living areas, such
as garages or covered porches, aren't included in GLA, but are
accounted for and considered in value seperately. Finished basements
are also calculated separately from the above-ground GLA. The local
market will dictate the contributory value of the finished basement,
which can be influenced by governmental regulations, the degree of
modernization, the quality of the finish, and other factors.
The appraiser will generally consider only permanent fixtures and
real property. Because many above-ground swimming pools and small
sheds are not permanent structures, they typically usually aren't
included in the valuation. Depending on the specific installation
process and local custom, however, an above ground pool or small
shed might be considered part of the real property.
What improvements add the most value to my home?
Just how much any particular individual improvement might add to
your home's market value, what appraisers typically call the
contributory value, can often vary widely from market to market,
dictated by the wants and needs of each neighborhood. However, a
local appraiser familiar with your market can help you figure out
the best home-improvement value. Check out Remodeling On-Line's Cost
Vs. Value Report which features some information on how improvements
might increase the value of your home from market to market.
If my appraisal comes out higher than my tax value, could my real
estate taxes go up?
Absolutely not!. The appraiser is required to maintain
confidentiality with the client, which would typically be you (if
you undertook the appraisal) or the bank (in a mortgage related
appraisal), not the local tax authorities.
Short form "2055" Vs. "URAR Fannie Mae" Form Appraisal Report
A "Fannie Mae" - URAR form report has many items required by the
secondary mortgage lending market, that are not neccesarily needed
in a simple report to find the market value. Both primarily rely on
a direct sales comparison or market approach with a comparison grid
(see below) to determine the market value of the subject property.
The lenders report has many additional arbitrary requirements which
have little bearing on the value found by a report needed for many
other purposes. The traditional "lender" reports need census tract &
smsa information for tracking lending patterns. Some lender reports
require a lot of the appraisers effort to determine and substantiate
how much additional rental income is available to support a higher
mortgage. In addition, a great deal of detail is required to help
the lender determine what if any, necessary repairs might be needed
before the property meets their underwriting requirements. All of
these things and much more, may be quite important for a lender, but
probably are useless for most people, who just want to know what a
property is worth for a variety of reasons. Our short form reports
are particularly well suited for helping a seller to price a home
for sale, helping a buyer to decide how much to offer or pay for a
home, for estate tax, gift tax, tax grievance, uncontested divorce &
most any other potential use other than for obtaining a mortgage or
in litigation where the report will be used in conjunction with
In our complex society, you may need and use the services of a
professional real estate appraiser for a variety of reasons.
Depending upon an appraiser's designation and qualifications, he or
she can provide some or
all of these services: Appraisals -
Residential or Commercial; Counseling and Consulting; Evaluations;
Expert Witness Testimony; Litigation Preparation; Feasibility
Studies; Market Analysis; Market Rent & Trend Studies; Tax
Assessment Review and Advice or Zoning Testimony.
Know Your rights in the appraisal process!
Under the Equal Credit Opportunity Act, your lender must provide you
with a copy of the appraisal report upon your written request. If
you are dissatisfied with any information contained in your
appraisal report, you should contact your lender immediately.
What is the difference between a certified appraisal and a brokers
market analysis or price opinion?
A certified appraisal is a formal, impartial estimate or opinion of
value, usually written, of an adequately described property, as of a
specific date, and supported by the presentation and analysis of
relevant data. It is prepared as a result of a retainer, for
reliance by identified parties, and for which the appraiser accepts
responsibility. Only a state certified appraiser can provide a
A comparative market analysis or brokers price opinion is an
informal estimate of market value, based on comparable sales in the
neighborhood, performed by a real estate agent or broker. You can do
your own cost comparison by looking up recent sales of comparable
properties in public records. These records are available at local
recorder's or assessor's offices, through private companies or
increasingly on the Internet through such sources as Domania or
The most important difference between a certified appraiser and
broker or real estate sales agent is their motivation. A brokers
typical goal is to obtain a listing and earn a commission. Although
most brokers and agents are honest some might tell you what they
think you want to hear. A certified appraiser is independent and has
no axe to grind. They have no ulterior motives. Their only concern
is to deliver a fair, accurate objective appraisal.
The following Items, if available, will help your appraiser to
provide a more accurate appraisal in a shorter period of time.
A survey of the house and property; A deed or title report showing
the legal description; a recent tax bill; a list of personal
property to be sold with the house if applicable; a copy of the
original plans & specifications, The date and purchase price you
paid when you purchased the property; a list of recent improvements
& cost as well as any other information you feel may be pertinent.
The Appraisal Process
The appraisal process is an orderly and concise method of reaching
an estimate of value. The process has six major steps which include:
definition of the problem, preliminary survey and appraisal plan,
data collection and analysis, application of the three approaches to
value, reconciliations of value indications, final estimate of
defined value. This process assists the appraiser in reaching a
sound conclusion. The major phase of this process involves the
application of the three approaches to value which include the
Market Data Approach, the Cost Approach and Income Approach. The
three approaches are reconciled and the value via most applicable
approach, in the opinion of the appraiser, is selected as the final
estimate of value. In most residential appraisals, particulary those
of single or two family dwellings, the direct sales comparison or
market approach best reflects the actions of buyers and sellers and
is the most convincing and defendable approach to value.
The market or direct sales comparison approach to value
The market or direct sales comparison approach to an estimate of
value is a process of comparing market data, that is, prices paid
for similar properties, prices asked by owners, and offers made by
prospective purchasers or tenants willing to buy or lease. Typically
a comparison grid is used and adjustments are made to each of the
comparable sales used for major differences between the comparable
and the subject property for such items as location, gross living or
building area, lot size, condition/effective age, market conditions,
degree of remodeling, construction quality and significant
amenities, ie: fireplace, jacuzzi, in ground pool, garage, deck,
patio, porch and central air conditioning etc. In the market
approach, the appraiser attempts to both gauge and reflect the
anticipated reaction by a typical purchaser to the subject property.
A comparable sale is a property, that is similar to the subject
property in most respects, is located in a similar (nearby)
location, and has sold recently at arms length. The selection of
comparable sales is in most residential appraisals, the single most
important determining factor in establishing value. It is the
appraisers responsibility to adequately research the local real
estate market and determine which comparable sales best represent
the value characteristics of the subject property.
of title insurance is a contract of indemnity between the insured
and the insuring company relating to the title to the land described
in the policy, protecting the insured against loss of damage by
reason of defects, liens or encumbrances of the insured title
existing at the date of the policy and not expressly excepted from
Market value or fair market value is the most probable price that a
property should bring (will sell for) in a competitive and open
market under all conditions requisite to a fair sale, the buyer and
seller, each acting prudently, knowledgeably and assuming the price
is not affected by undue stimulus. Implicit in this definition is
the consummation of a sale as of a specified date and the passing of
title from seller to buyer under conditions whereby: (1) buyer and
seller are typically motivated; (2) both parties are well informed
or well advised; (3) a reasonable time is allowed for exposure to
the open market; (4) payment is made in terms of cash in U.S.
dollars or in terms of financial arrangements comparable thereto;
and (5) the price represents the normal consideration for the
property sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale.
The cost approach to value The cost approach combines an estimate of
land value with an estimate of depreciated reproduction or
replacement cost of the improvements. The principle of substitution
is the basis of the cost approach, in that no rational person will
pay more for a property than the amount for which he can obtain, by
purchase of a site and construction of a building, with undue delay,
a property of equal desirability and utility.
policy is issued after a complete search and examination of the
public records and shows the condition of the record title,
including any money obligations outstanding against the property,
easements and other matters which may affect the rights of
ownership, possession and use of the property.
insurance protects the "record" title, insuring it is good subject
only to the exceptions expressly set out in the policy. lt also
insures against certain matters which do not appear of record, such
as forgery, identity of parties, incompetence of former owners,
interest of missing heirs, and status of individuals not having the
"right" to sell property.
are different types of policies. Owners’ policies are issued to real
estate owners. Purchasers’ policies are issued to purchasers of real
estate under contract. Mortgage policies are issued to mortgage
companies. In addition there are several other special forms of
policies. There is a type of policy to meet the requirements of
almost any form of real estate transaction.
Are there different types of
Title Insurance policies?
Yes. Basically there are two different types of policies - a loan
policy and an owner's policy. The loan policy protects the lender's
in the property as security for the outstanding balance
under the buyer's investment or equity in the property up to the
face amount of the policy. (Title insurers in many states offer
increased policy coverage through inflation endorsements to cover
increases in value due to inflation.)
How much does title insurance cost?
Probably a lot less than you think. Charges vary in different
sections of the country, but generally the cost of title insurance
(including search, examination and related services) amounts to
about one percent or less of the cost of the property. And unlike
other insurance premiums, which must be paid annually, a title
insurance premium is paid one time only, usually at settlement.
How long does my coverage last?
For as long as you or your heirs retain an interest in the property
and, in some cases, even beyond.
Where can I get title insurance?
From any licensed title insurance company or its representatives
operating in your state. When choosing a title insurer, it is
important that you look for a company with expertise and experience,
as well as the financial strength to protect you should a claim
arise. Your broker or attorney can recommend such a company.
Although the buyer usually will have a home inspection done, I
recommend to many clients that they go to the expense of having a
termite report done on their own. The reason being that you can take
care of any problems and improve the marketability of your home.
Any home, new or used, will have minor problems. For instance, an
electrical outlet may not work, there may be a leaking faucet or
maybe roof, one of the appliances may not work. The purpose of a
home inspection is to insure that the buyer is aware of all problems
and potential problems with a home before they buy. A seller is
required in most cases to make the necessary repairs to insure
everything is in working order. The buyer or their realtor should
schedule a home inspection immediately after acceptance of an offer
to purchase. Basically the inspector will check the home from the
roof to the foundation and everything in between. He will run the
dishwasher, check the heating and cooling systems, check the
plumbing, electrical, check for leaks, etc. He will give the buyer
and/or the buyer’s agent a written report on the spot or fax or mail
the report within 2 or 3 days. At the buyer’s or the buyer’s agent’s
request the seller or seller’s agent will be given a copy of the
report as well. The buyer may want or need to also have a separate
roof inspection. If the buyer wants to have inspections for radon,
lead-based paint, environmental hazards, etc. they will need to have
these completed within the same period. Pest control inspections are
generally not done until 30 days before closing, due to lender
requirements. In many cases the home inspection company may be a
licensed pest control company as well. It would not be prudent for a
homebuyer to forego a home inspection before purchasing a home.
Under Virginia law the seller must disclose (seller’s disclosure) to
the buyer all known facts that materially and adversely affect the
value of the property being sold and that are not readily
observable. The key word is known. Your agent should have you fill
out this disclosure before you put your home on the market. There
are often things wrong with your home that you may not know about.
The home inspection checks the interior and exterior of the home,
goes up into the attic space, and goes in the crawl space, if there
is one. The price of a home inspection will vary with the size of
home and with the amenities of the home (crawlspace, pool, etc.).
Expect to pay anywhere from $250 to $500.
The inspection is done to determine whether any warranted items are
in need of repair. Generally the seller warrants that the structure
(including roofs and pool) are structurally sound and are
watertight, and that the appliances, heating, cooling, mechanical,
electrical, security, sprinkler, plumbing systems, dock and pool
equipment, if any, are in working condition and will be maintained
in working condition until closing. The seller does not warrant and
is not required to repair cosmetic conditions (unless the cosmetic
condition resulted from a defect in a warranted item). Cosmetic
conditions means aesthetic imperfections that do not affect the
working condition of the item, such as tears, worn spots and
discoloration of items such as floor coverings, wallpapers, window
treatments; nail holes, scratches, dents, scrapes, chips and
caulking in bathroom ceilings, walls, flooring, tile, fixtures,
mirrors; tears or holes in screens; and minor cracks in windows,
driveways, sidewalks, pool decks, garage and patio floors. The
seller is not obligated to bring any items into compliance with
existing building code regulations (unless necessary to repair a
warranted item). Codes are constantly changing, and vary from one
municipality to another. If the item was installed properly under
the code existing at the time of installation no more can be
required. The inspector will point out items that he recommends
bringing to current code, such as GFI (ground fault interrupt)
outlets, but this is a buyer option, not a seller requirement. Note
that most contracts provide that a licensed contractor or repair
person must do any repairs.
Items commonly noted in an inspection:
Electrical panel: a fuse that is double lugged.
Faucet that will not turn completely off.
Outlet that does not have power.
Who pays for the inspection and how much does it cost?
The buyer pays for the home inspection. Most inspectors charge about
$200 to $300 for a condo and about $250-$500 for a house. Of course
larger properties with 2 or more stories, larger square footage, or
older homes that are in very poor condition can be higher. Always
describe the property accurately to the inspector in order to get an
accurate price quote.
Is a Termite Inspection required?
A termite inspection is not always required. However, most of the
time it is performed. One of the main reasons is that most lenders
making the loan require a pest inspection and repairs if there is
Who picks the Termite Inspector?
Generally the buyer (or the buyer's agent) picks the termite
inspector since they will be paying for it. In many cases the
company doing the inspection of the home may also be licensed to do
the termite inspection.
Termite Inspection on condominiums or townhouses
The type of structure determines if an inspection is required.
Typically the HOA (Homeowners Association) is responsible for
termite issues in the common areas and exterior of your condo. It is
fairly uncommon for a termite company to recommend tenting a condo
building when a sale occurs. Usually the HOA will contract with a
termite company for periodic inspections and maintenance. In most
cases a termite inspection is not required for a condo. However,
some lenders still may require a complete termite report and
clearance for condos.
The last thing a home buyer wants to worry about after closing is
what could possibly break or malfunction in her new home. Since that
can cover a multitude of items and systems, for peace of mind, it's
a good idea to get a home protection plan. It's especially a good
idea to obtain a home warranty if you're a first-time home buyer
with no experience maintaining a home.
Who Pays for the Home Warranty?
Now, whether the seller pays for the home protection plan and home
warranty coverage or whether the buyer pays for it, will depend on
your local customs. It varies. In many locales, it's normal for a
seller to pay for the coverage because it's a seller benefit. Why?
Because then the buyer won't be calling the seller after closing if
something breaks. Many real estate agents will also give buyers a
home warranty as a gift at closing.
How Much does a Home Warranty Cost?
They are fairly inexpensive, typically ranging from $250 to $400,
depending on coverage. Home warranty companies sometimes run special
sales and either discount policy prices or offer additional coverage
for the same price. The policies are prepaid for a year in advance,
at which time they expire or can be renewed.
How Do They Work?
Although specific plans provide for specific types of coverage, most
operate the same way.
If a home system or appliance breaks or stops working, the home
owner calls the home warranty company.
The home warranty company calls a provider with which it has a
The specific provider calls the home owner to make an appointment.
The provider fixes the problem. If an appliance is malfunctioning
and cannot be repaired, depending on contract coverage, the home
warranty company will pay to replace and install the appliance.
The home owner pays a small trade service fee (less than $100).
Types of Coverage
Because all plans differ, you will want to ask specifically what is
covered. Ask your real estate agent if upgrades are available. Pay
close attention to whether the home warranty company will pay for
repairs to make certain types of systems or appliances compliant
with new regulations.
What If I Disagree With the Diagnosis?
Sometimes a service provider will deny a claim. (See below.) If that
happens or if you are unhappy with the service provided, call your
real estate agent and complain. Your real estate agent, if she has a
good working relationship with the representative from the home
warranty company that is covering your home, well, she can seek
resolution for you. Agents all over the country are going to be very
upset at this suggestion, but it works. If my client calls me with a
problem, I call my rep, and she eventually finds a way to work out a
solution acceptable to all the parties involved.
In short, don't take "no" for an answer! Call your real estate
What is Not Covered?
Outdoor items such as sprinklers
Faucet repairs are not covered under all plans
Not all plans pay for refrigerators, washers & dryers or garage door
Spa or pools, unless specific coverage requested
What Can Cause Denial of Payment?
Unusual wear and tear
Furnace / heating
Inside plumbing stoppages
Range and oven
Because coverages vary from state to state and from policy to
policy, ask to see a sample copy of a policy before you commit.
More Home Buying / Selling Quick Tip
Why You Need a Home Inspection
Buying a home is one of the most important purchases you will make
in your lifetime, so you should be sure that the home you want to
buy is in good condition. A home inspection is an evaluation of a
home’s condition by a trained expert. During a home inspection, a
qualified inspector takes an in-depth and impartial look at the
property you plan to buy. The inspector will:
Evaluate the physical condition: the structure, construction and
Identify items that should be repaired or replaced.
Estimate the remaining useful life of the major systems (such as
electrical, plumbing, heating, air conditioning), equipment,
structure and finishes.
The home inspector does not estimate the value of the house.
After the inspection is complete, you will receive a written report
of the findings from the home inspector, usually within five to
This brochure is primarily for homebuyers that buy their homes with
the help of the Federal Housing Administration (FHA) mortgage
insurance programs. All homebuyers can benefit from the information
in this brochure to understand the difference between home
inspections and appraisals, the benefits of home inspections, how to
find a qualified inspector, and the importance of radon testing.
Home Inspections Are Not Appraisals
A property appraisal is a document that provides an estimate of a
property’s market value. Lenders require appraisals on properties
prior to loan approval to ensure that the mortgage loan amount is
not more than the value of the property. Appraisals are for lenders;
home inspections are for buyers.
FHA, which is part of the U.S. Department of Housing and Urban
Development (HUD), requires lenders to obtain appraisals of
properties securing FHA-insured loans. FHA requires appraisals for
To estimate the market value of the property.
To make sure that the property meets FHA minimum property
requirements/standards (health and safety).
To make sure that the property is marketable.
The FHA appraisal process will note property deficiencies that are
readily observable and found not in compliance with HUD’s minimum
property requirements/standards (Handbook 4905.1 REV-1 and Handbook
4910.1). These deficiencies may not be the same as those items noted
in a home inspection report.
About FHA Home Inspections
FHA helps individuals and families become homeowners by providing
lenders with mortgage insurance for certain loans.
FHA does not guarantee the value or condition of your future home,
and FHA does not perform home inspections. If you find problems with
your new home after closing, FHA cannot give or lend you money for
repairs, nor can it buy the home back from you.
That’s why it is so important for you, the buyer, to get an
independent home inspection. Ask a qualified home inspector to
thoroughly examine the physical condition of your future home and
give you the information you need to make a wise decision.
The Bottom Line: Spending Hundreds May Save Thousands
When you make a written offer on a home, you should insist that the
contract state that the offer is contingent on a home inspection
conducted by a qualified inspector. You will have to pay for the
inspection yourself, but it could keep you from buying a house that
will cost you far more in repairs down the road. If you are
satisfied with the results of the inspection, then your offer can
FHA does not guarantee the value or condition of your potential new
home, and FHA does not perform home inspections.
Finding a Qualified Home Inspector
As the homebuyer, it is your responsibility to carefully select a
qualified inspector and pay for the inspection.
The following sources may help you find a qualified home inspector:
State regulatory authorities. Some states require licensing of home
Professional organizations. Professional organizations may require
home inspectors to pass tests and meet minimum qualifications before
becoming a member.
Phone book yellow pages. Look under “Building Inspection Service” or
“Home Inspection Service.”
The Internet. Search for “Building Inspection Service” or “Home
Your real estate agent. Most real estate professionals have a list
of home inspectors they recommend.
Radon Gas Testing
The U.S. Environmental Protection Agency and the Surgeon General of
the United States have recommended that all houses should be tested
for radon. For more information on radon testing, call the National
Radon Information Line at 1-800-SOS-Radon or 1-800-767-7236. As with
a home inspection, if you decide to test for radon, you may do so
before signing your contract, or you may do so after signing the
contract as long as your contract states the sale of the home
depends on your satisfaction with the results of the radon test.
Why buy Home Owner's Insurance?
· Owners: To protect both your house and personal property.
· Tenants: To protect your personal property.
· Everyone: Protection against liability for accidents that injure
other people or damage their property.
How much home insurance do I need?
· Asset Protection: More coverage generally means you will have less
to pay out of your own pocket if disaster strikes. You must
determine the amount you can financially afford to lose. Depending
upon your determination, more insurance may be the answer. You need
enough liability coverage to protect yourself from lawsuits
resulting from your possible negligence.
· Lender Requirements: Your lender may require you to cover the
house for at least the amount of the mortgage. You are not required
to purchase insurance from the insurer recommended by your lender.
· Policy Requirements: Insurers may impose some conditions for
replacement cost protection, including insurance of the property to
What affects home insurance prices?
· Type of Construction: Frame houses usually cost more to insure
· Age of House: New homes may qualify for discounts. Some insurance
companies offer limited coverage or may not insure older homes.
· Local Fire Protection: The number of fire hydrants and fire
departments and the availability of water are some factors that
determine your area's fire protection class. If you reside in an
area without fire protection, you will pay more for fire insurance.
What's a peril?
A peril is a condition that can cause a loss. Three examples are
fire, windstorm, and theft.
What deductible should I choose?
The deductible applies only to the coverages on your house and
personal property. It is the amount you have to pay out of your
pocket on each claim. You can collect on your insurance policy once
the deductible amount is exceeded. A policy with a $100 deductible
will cost more than one with a $250 deductible. Higher deductibles
also will result generally in fewer claims, at a time when insurers
are nonrenewing if the number of claims is considered "excessive."
What basic coverages are available?
The most common basic coverages are: property damage, additional
living expenses, personal liability and medical payments.
What does property damage cover?
Property damage coverage helps repair your home and personal
property when damaged by such perils as fire, lightning, windstorm
or hail. The perils of flood and earthquake are covered when the
coverage is added to your policy. If you believe you need flood
insurance and your insurance company will not provide it, you may
obtain coverage through the federal government's National Flood
Program ("NFP"). To learn more about the NFP, you can contact an
insurance agent or contact the NFP at (800) 638-6620. You should
carefully read your policy before you have a loss to determine
exactly what types of losses will be covered.
What does personal property insurance coverage include?
In general, the contents of your home and other personal belongings
owned by you or family members who live with you are covered under
the policy equal to 50 percent of the value carried on your
dwelling. However, high-valued personal property such as jewelry and
cameras should be listed on the policy so that you are adequately
What does additional living expense or loss of use cover?
Most home insurance policies cover extra costs you incur if your
home is damaged by an insured peril and you cannot live there while
repairs are made or if you are denied access to your home by
government order. The coverage is generally subject to duration
limits and commonly covers any expense incurred by you so that your
household can maintain its normal standard of living. In some
instances, this coverage may include the costs of a motel, eating in
a restaurant or storing some property.
What is personal liability insurance coverage?
Personal liability coverage protects you and all family members who
live with you against a claim or lawsuit resulting from (non-auto
and non-business) bodily injury or property damage to others and for
which you become legally obligated to pay. Defense costs are
included, but the insurance company has no duty to defend you after
the limit of liability on the policy has been exhausted.
What does medical payments insurance cover?
Regardless of fault, this coverage pays the reasonable expenses for
others accidentally injured on your premises or the areas
immediately adjoining your property such as sidewalks or alleys.
Medical payments coverage does not apply to your own injuries or
those of family members living with you or injuries arising out of
activities involving a business that you operate out of your home,
your intentional acts, or rental use of your premises.
What is replacement cost?
Replacement cost is the amount necessary to replace or rebuild your
home or repair damages with materials of similar kind and quality
without deducting for depreciation.
What is actual cash value?
Actual cash value usually means amount needed at the time of the
loss to repair or replace the property destroyed, less depreciation.
Most standard home insurance policies cover the contents of your
home (i.e., personal belongings) on an actual cash value basis, but
it is possible to purchase replacement cost coverage.
What should I do if my premium increases and I want to get quotes
from other companies?
Missouri only requires insurers to give you 30 days notice on your
renewal, which often is not enough time. If you need more time,
considering paying monthly installments until you make a final
decision on your insurer.
When shopping around, try to get all your quotes in a two-week
period. Shopping around for insurance coverage can now damage your
credit score because each insurer may run a credit check. As best we
can tell, getting all your insurance quotes and buying a new policy
in a two-week period increases the chance that you can keep damage
to your credit score at a minimum.
If you receive a premium notice that doubles your insurance premium
on your homeowners policy form the previous year, we encourage you
to call the Missouri Department of Insurance, Financial Institutions
& Professional Registration at 1-800-726-7390.
How can I get a lower premium?
Strongly consider a higher deductible so you can cut your premium.
In the current insurance market, don't tempt yourself with the
possibility of a small claim, considering that many insurers now
refuse to renew polices with a claim history and refuse to accept
new customers with prior claims. View your homeowners insurance as
catastrophic coverage only, and set aside your premium savings to
cover minor repairs.
What if I receive a notice of nonrenewal?
Explore whether your company will extend your coverage if you
increase your deductible. With many insurers dropping frequent
claimants, the higher deductibles will mean fewer claims and, if
nothing else, buy time until you have the opportunity to find
Apply for coverage with several companies simultaneously. Otherwise,
you may not have enough time to get competitive bids. This grouping
of applications also gives you the best chance of avoiding major
damage to your credit score. Ask in advance if a company accepts new
applicants with recent claims. Most preferred companies will not
insure anyone with one claim in 3 years.
Make every effort to get regular coverage, even though you can
expect to pay more than for your current policy. The alternatives in
Missouri are the MO Property Insurance Placement Facility (FAIRPLAN),
which provides a fire policy (no liability) with no more than
$100,000 in coverage for your home and contents combined, or the
surplus lines market, which seldom insures any home less than
$100,000 and provides very expensive coverage.
If you have a mortgage and your coverage lapses, the finance company
or bank may be able to provide insurance and charge you high rates
for inadequate coverage; these forced placement contracts only
covers its stake in your home's value, not your equity.
I had a loss, and my roof needs repair. The company is only willing
to pay for repairing part of the roof even though the contractor has
said that I need to replace the entire roof.
If the shingles that are currently on your roof are no longer
manufactured, the company is responsible for replacing your entire
roof. But if your shingles are manufactured and do not match the
existing shingles due to weathering, the company is only responsible
for replacing the damaged shingles, not the whole roof.
I have replacement coverage for contents under a homeowner's policy.
Some of my property has been stolen. Can the company settle for an
amount less than replacement?
The company will usually pay the actual cash value, which is the
replacement cost minus depreciation, for the loss or damage - until
the property is replaced. Once the insured replaces the damaged
property and provides receipts to the company, the company should
reimburse the difference.
I have had homeowner's insurance with the same company for years. I
had two claims last year, and now the company will not renew my
policy. Can they do this?
Yes. Each company has its own underwriting guidelines, which
indicate what risks they will assume. State law permits an insurer
to nonrenew a homeowner's policy on the policy anniversary date as
long as they give the insured 30 days advance written notice and the
specific reasons for the nonrenewal.
What protection does the personal liability coverage in my
homeowner's insurance policy provide?
This coverage protects you and all family members living with you
against claims or lawsuits resulting from bodily injury or property
damage to others for which you are negligent and legally liable,
with exceptions such as intentional acts.
Does my homeowner insurance policy cover flood damage?
Generally, homeowner insurance policies do not offer protection
against flood losses. You should check your policy under Section I -
Exclusions. It would probably be listed under "water damage".
Flood insurance is available through the federal government's
National Flood Insurance Program. It may be purchased through any
licensed property/casualty insurance agent or through many private
insurance companies that are now writing flood insurance under
arrangements with the Federal Insurance Administrator.
What is credit scoring?
A credit score is a snapshot of your credit at one point in time.
The credit information from your credit report is put through a
mathematical formula (credit scoring model) that assigns weights to
the various factors and summarizes your credit information into a
three-digit number ranging from zero to 999. Many insurers believe
that the lower the number, the more likely the consumer will file a
How is credit scoring used?
If your insurance company relies on credit scoring, they may use it
in two ways:
· Underwriting — Deciding whether to issue you a new policy or to
renew your existing policy.
· Rating — Deciding what price to charge you for your insurance by
placing you into a specific rating "tier" or level.
Some insurers use credit information along with other more
traditional rating factors, such as claims history. Other insurers
may use credit alone to determine your rate. (A new Missouri law
prohibits the use of credit scores solely to decide whether to
accept you as an auto or homeowners customer, effective July 1,
2003.) Insurance rates based on credit information can vary from
company to company; if you feel your rate is too high, shop around.
What affects a credit score?
Several factors determine credit scores. Each factor is assigned a
weighted number that, when applied to your specific credit
information and added together, equals your final three-digit score.
Following is a list of common factors:
· Major negative items — Bankruptcy, collections, foreclosures,
liens, charge-offs, etc.
· Past payment history — Number and frequency of late payments.
· Length of credit history — Amount of time you've been in the
· Homeownership — Whether you own or rent.
· Inquiries for credit — Number of times you've recently applied for
new accounts, including mortgage loans, utility accounts, credit
card accounts, etc.
· Number of open credit lines — Number of major credit cards,
department store credit cards, etc., that you've actually opened.
· Type of credit in use — Major credit cards, store credit cards,
finance company loans, etc.
· Outstanding debt — How much you owe compared to how much credit is
available to you.
Know your credit history
Your current or prospective insurance company likely is looking at
your credit. So review the accuracy of your credit history. Request
a copy of your credit history from the credit bureau Equifax,
Experian, or Trans Union. You can also contact the Federal Trade
Commission for consumer brochures on credit.
The Fair Credit Reporting Act requires an insurance company to tell
you if they have taken an "adverse action" against you, in whole or
in part, because of your credit report information. If your company
tells you that you have been adversely affected, they must also tell
you the name of the national credit bureau that supplied the
information so that you can get a free copy of your credit report
and correct any errors.
Take charge of your credit history
If your insurance company is using your credit score to evaluate
your rates, you can take steps to improve your premiums.
· Get a copy of your credit report and correct any errors. Notify
your insurance agent and company of any errors.
· Improve your credit history if you've had past credit problems. If
your credit score is causing you to pay higher premiums, ask your
insurer if they will re-evaluate you when your credit improves.
What is a Fixed Rate Mortgage?
A fixed rate mortgage is a mortgage in which the interest rate and
the principal payments do not change during the entire term of the
loan. The most common mortgage terms are 15 and 30 years.
What is an ARM?
An ARM is an Adjustable Rate Mortgage. It is a mortgage in which the
interest rate is adjusted periodically based on a pre-selected
index. The Fully Amortizing ARM is the most common type of ARM. The
monthly payment is calculated to payoff the entire mortgage balance
at the end of the term. The term is typically 30 years. After any
fixed interest rate period has passed, the interest rate and payment
adjusts annually. A Fully Amortizing ARM will also have a maximum
rate that it will not exceed. Components of an ARM include and
Index, Margin, Adjustment Period, Adjustment Cap and Lifetime Cap.
Below is a list of the most common types of Fully Amortizing ARMs.
Common Adjustable Rate Mortgages
Fixed for 120 months, adjusts annually for the remaining term of the
Fixed for 84 months, adjusts annually for the remaining term of the
Fixed for 60 months, adjusts annually for the remaining term of the
Fixed for 36 months, adjusts annually for the remaining term of the
1 year ARM
Fixed for 12 months, adjusts annually for the remaining term of the
What is an Interest Only ARM?
An Interest Only ARM only requires monthly interest payments. Since
you are not paying any principal you typically have a lower monthly
payment. However, since your mortgage’s principal balance is not
decreased, you may have a balloon payment at the end of the
mortgage’s term. Like a Fully Amortizing ARM, an Interest Only ARM
will often have a period where the interest rate is fixed, and then
it is adjusted annually. An Interest Only ARM will also have a
maximum interest rate that it will not exceed.
What is a Hybrid ARM?
A Hybrid ARM unlike a true ARM that adjusts for the same periods for
the life of the loan is fixed for a set starting period. After the
starting period the interest rate adjusts for the same period for
the remaining life of the loan.
What is an Option ARM?
An Option ARM is an adjustable rate mortgage with added flexibility
of making one of several possible payments on your mortgage every
month, in order to better manage your monthly cash flow. The most
typical payment options start with the minimum payment option in
which your monthly payment is set for 12 months at your initial
interest rate. After that, the payment changes annually, and a
payment cap limits how much it can increase or decrease each year.
If the minimum monthly payment is not sufficient to pay the monthly
interest due it results in negative amortization. The options also
include an interest-only payment, a fully amortized payment based on
a 30-year loan and a fully amortized payment based on a 15-year
What is Negative Amortization?
Negative amortization is an amortization method in which the
borrower pays back less than the full amount of interest owed to the
lender each month. The shorted amount is then added to the total
amount owed to the lender. Negative amortization is also referred to
as deferred interest. Such a practice would have to be agreed upon
before shorting the payment so as to avoid default on payment.
Negative amortization loans today are mostly ARMs and many have a
graduated payment option. This option offers a set monthly payment
at the initial interest rate. After that, the payment changes
annually, and a payment cap limits how much it can increase or
decrease each year. This typically results in negative amortization.
Since the payment increases over time, it has aspects of the ARM
loan until amortizing payments are required.
What is an Index?
An index is a published interest rate against which lenders measure
the difference between
the current interest rate on an adjustable
rate mortgage and that earned by other investments. It is used to
adjust the interest rate on an adjustable mortgage up or down.
Common indexes used to establish ARMs include:
What is a Margin?
A margin is the amount a lender adds to the index on an adjustable
rate mortgage to establish the adjusted interest rate. The margin is
one of the most important aspects of ARMs because it is added to the
index to determine the interest the borrower pays. The margin added
to the index is known as the fully indexed rate. As an example if
the current index value is 5.50% and your loan has a margin of 2.5%,
your fully indexed rate is 8.00%.
What is an Adjustment Period?
The adjustment period is the number of months between each rate
adjustment after the 1st adjustment.
What is an Adjustment Cap?
An adjustment cap is the maximum percentage that the rate will
increase for each subsequent adjustment periods after the first
What is a Lifetime Cap?
A lifetime cap is the maximum percentage that the note rate can rise
What is a FHA Loan?
Is FHA financing complicated?
Years ago, FHA financing was more complicated than conventional
financing. However changes over the years have streamlined the FHA
loan process and in many cases, FHA home loans are easier than
Who qualifies for a FHA home loan?
The program is open to virtually everyone. There are a few
restrictions placed upon credit and residency that may preclude
someone from obtaining a FHA home loan.
Is it true that the down payment can be gifted?
Yes. Current FHA guidelines permit a relative, a governmental
agency, or approved non-profit organization to gift the borrower's
down payment. A gift, according to HUD, is just that--a gift. HUD
does not permit the borrower to repay the gift as a stipulation of
giving the gift.
What is the minimum amount of money I need to buy a home with a FHA
The National Housing Act requires the minimum cash investment to be
3 percent of the sales price. Even though the actual down payment
may be less than 3 percent, the balance would go towards the
borrower's closing costs. In the event that there are no closing
costs, the down payment would be increased to 3 percent.
I have had a bankruptcy in recent years. Can I get a FHA loan?
Generally a bankruptcy will not preclude a borrower from obtaining a
FHA loan. Ideally, a borrower should have re-established a minimum
of two credit accounts (such as a credit card, car loan, etc.) and
wait 2 years since the discharge of a Chapter 7 bankruptcy or have a
minimum of 1 year of repayment with a Chapter 13 (the borrower must
also seek permission of the courts to allow this). Furthermore, the
borrower should not have any late payments, collections, or credit
charge-offs since the discharge of the bankruptcy. If a borrower has
suffered through extenuating circumstances (such as surviving cancer
but had to declare bankruptcy because the medical bills were to
much), special exceptions can be made (rarely).
Is the upfront mortgage insurance premium negotiable?
No. In order to cover some of the costs incurred by HUD for FHA
loans, they must assess the upfront and monthly mortgage insurance
to the home buyer. This upfront fee equals 1.50% and the borrower
will have to pay 0.5% annually in mortgage insurance premiums.
However, if you are buying a condominium, you do not have to pay the
upfront mortgage insurance premium.
How long does it take to receive my MIP refund?
Generally, it takes approximately four to six weeks to receive your
MIP refund if you have sold your home and paid off an existing FHA
home loan or refinanced your FHA mortgage to another mortgage other
than FHA. If you refinance your property to another FHA loan, a MIP
refund credit will be applied to the balance you owe against the
home at the time of closing. Former FHA borrowers who think they
might be due a refund can call a toll free number, 1-800-697-6967,
or write HUD at P.O. Box 23669, Washington DC 20026-3699. Or you can
look for your name with the HUD Refund Search Form
How do I find out if a condo or PUD is HUD approved?
You can search online at the following website urls:
VA Home Loan Mortgage Questions
Definition of a VA Loan - What is a VA loan?
The VA loan began in 1944 through the original Servicemen's
Readjustment Act, also known as the GI Bill of Rights. The GI Bill
was signed into law by President Franklin D. Roosevelt and provided
veterans with a federally guaranteed home with no down payment. This
feature was designed to provide housing and assistance for veterans
and their families, and the dream of home ownership became a reality
for millions of veterans. VA guaranteed loans are made by private
lenders, such as banks, savings & loans, or mortgage companies to
eligible veterans for the purchase of a home, which must be for
their own personal occupancy. The guaranty means the lender is
protected against loss if you or a later owner fails to repay the
loan. The guaranty replaces the protection the lender normally
receives by requiring a down payment allowing you to obtain
favorable financing terms.
Using the VA Loan is a Good Idea
The more you know about our home loan program, the more you will
realize how little "red tape" there really is in getting a VA loan.
These loans are often made without any downpayment at all, and
frequently offer lower interest rates than ordinarily available with
other kinds of loans. Aside from the veteran's certificate of
eligibility and the VA-assigned appraisal, the application process
is not much different than any other type of mortgage loan. And if
the lender is approved for automatic processing, as more and more
lenders are now, a buyer's loan can be processed and closed by the
lender without waiting for VA's approval of the credit application.
Uses for a VA Home Loan
To buy a home (including townhouse or condominium unit in a
VA-approved project), to build a home, to simultaneously purchase
and improve a home, to improve a home by installing energy-related
features, or to buy a manufactured home and/or lot. On manufactured
homes, there must be land included with the home and the home must
be at least 24 feet wide. The manufactured home must have an
The maximum amount of guarantee the VA will allow on a home loan and
maximum loan amounts
The maximum guarantee authorized by the VA is 25 percent of the loan
amount up to $104,250. The maximum VA home loan is $417,000. The
maximum guarantee in the states of HI and AK is 25 percent of the
loan amount up to $156,375. The maximum VA home loan in these states
What can be done when both husband and wife are eligible
They may acquire property jointly, but the amount of guarantee on
the loan may no exceed the lesser of 40 percent of the loan amount
or $36,000 ($104,250 for certain loans over $144,000).
I am a Veteran who purchased a home with my spouse utilizing my VA
eligibility. I am now divorced and my spouse was awarded the home.
How do I get my eligibility back?
When the property is awarded to the Veteran's spouse as a result of
the divorce, entitlement cannot be restored unless the spouse
refinances the property and / or pays off the VA loan in full or the
ex-spouse is a veteran who substitutes their entitlement.
I heard the VA has an inventory of foreclosed homes. How can I find
out more about this?
The Department of Veterans Affairs (VA) acquires properties as a
result of foreclosures on VA guaranteed loans. These acquired
properties are marketed through a property management services
contract with Ocwen Federal Bank FSB, West Palm Beach, Florida. The
properties are listed by local listing agents through local Multi
Listing Systems (MLS). A list of properties for sale may also be
obtained from Ocwen's website at http://www.ocwen.com/ . If you are
interested in buying a VA-acquired property when it is listed for
sale by Ocwen Federal Bank FSB, please contact a local real estate
broker of your choice to see the property. Interested Listing
Brokers and subcontractors may also access Ocwen Federal Bank's
website at http://www.ocwen.com/ for information on selling
VA Home Loan Entitlement - Isn’t the VA home loan automatic? It's
one of my entitlements, Right?
Some first-time homebuyers are misinformed as to the workings of a
VA Loan. The Veterans Administration does not normally act as a
lending agent. Instead, the VA is in the business of guaranteeing
the loans of veteran. In most cases, the VA offers a guaranty to
those who meet the requirements, the first of which include a good
credit rating. If you are considering any kind of home loan, it's
best to consult a credit counselor and a financial planner to find
out what credit rating you already have and what you can do to
improve your credit rating before applying for the guaranty. It's
important to know that a VA home loan guaranty is available only if
the veteran has the income to handle house payments. A VA loan
guaranty is not an automatic benefit. Your financial planner or
credit counselor can go a long way towards helping you prepare your
personal finances before filling out that home buyer's paperwork.
The VA Guaranteed Loan - Advantages
If you are looking to purchase a home with no money down, you're in
luck if you qualify. VA mortgage loans can be guaranteed with no
money down in most cases up to $417 thousand dollars. An added
bonus? No private mortgage insurance requirement with a VA
guaranteed loan. The VA even offers help for those looking to
refinance. Don't investigate these benefits without asking for
information about the interest rate reduction loan, part of
something called the Streamline Refinancing Program, which allows
veterans to refinance at little or no expense to them. VALoans.com
can give you all the details you'll need to take full advantage of
your VA home loan benefits.
Adjustable Rates - Do I have to take a fixed-rate VA loan?
Veterans who shop around will learn it's possible to get a fixed
rate loan, negotiated with the lender of your choice. Another
option? The adjustable rate loan, where interest may be adjusted one
percent annually, up to five percent over the duration of the loan
period. Which to choose? No matter which way you think is best, do
your homework, shop around and get the best rate possible. Some make
the mistake of taking the first offer that sounds fair, but don't be
intimidated by the process. You may be eager to get the "hard part"
over with and get into a home. Take some time to research the
biggest purchase of your life! When in doubt, consult an expert, a
legal advisor or a trusted friend in the real estate business. The
more research you do, the better you'll feel at closing time. The VA
is in the business of loan guaranty, but the choice of which loan to
take is strictly up to you. It's also a good idea to look for
businesses who make a habit of cultivating customers who are
veterans--you may find their expertise in VA matters quite valuable
to reduce unnecessary waiting times on paperwork.
Get Pre-Approved / Should I get a pre-approved loan?
Obtaining pre-approval for your VA loan amount is an excellent
time-saving step. Once you know the exact amount you're eligible for
in your VA home loan, you can begin searching for a home as a
'serious buyer'. You'll know in advance exactly what you can afford
and what is outside your price range. It's the kind of security
you'll be grateful for as you search for the best value for your
money. With pre-approval, you avoid wasting time with property
that's out of your price range or sellers who are unsure whether you
Are You Eligible for a VA Home Loan Guaranty - How do I get proof of
It's easy to use an online program called ACE--the Automated
Certificate of Eligibility--to get started in the VA loan guaranty
process, yet can only have this done by a VA approved lender.
Unfortunately, the automated system won't work for everyone. Some
people don't have enough information in the ACE database, and are
required to fill out a VA Form 22-1880, a Request for Certificate of
Eligibility. If this applies to you, simply fill out the form and
mail it to your regional Eligibility Center along with supporting
paperwork including a copy of the DD214 discharge paperwork. Don't
send originals of the DD214, a photocopy will do. The certificate of
eligibility process can be tricky for veterans who were separated
from the military with a discharge other than honorable. In this
case the VA must investigate the discharge to insure it was not
classified as dishonorable. People who fall into this category
should seek help from their local VA office, especially if you need
to file an appeal to the results of your request of eligibility.
Your Discharge May Affect Your Chances - I don’t have an honorable
discharge. Am I automatically disqualified from VA loan eligibility?
The nature of your discharge can affect your eligibility for a VA
loan. The certificate of eligibility process gets complicated for
veterans separated from the military with a discharge other than
honorable. In these cases the VA checks to see if the discharge was
classified dishonorable. If you had an 'other than honorable'
discharge, seek help from their local VA office, it's best to get
some expert advice on what additional information to file, where to
send the paperwork and what to do if an appeal is necessary. Be sure
to include copies of your DD214 form, plus any paperwork or
documentation showing that you either didn't receive a dishonorable
discharge, or had your discharge upgraded, modified, or corrected.
I Lost My DD214 - What if I can't find my DD214 form?
Those who have been discharged, separated or retired should keep
multiple copies of the DD214--your discharge paperwork. It's the
most important military document in your records. This is proof of
your military status, whether you are retired, separated,
discharged. It also displays the nature of your discharge, and what
your status is with the National Guard or a Reserve Unit. The lack
of a DD214 form can bring some of your VA processes to a halt, but
fortunately you can get a replacement copy by writing to the
National Personnel Records Center. Enclose a completed form SF-180
along with a letter stating the reason for your request, you name,
rank, social security number. If you are a recently discharged
military member who separated or retired at an overseas location,
remember that your DD214 form may be delayed overseas for up to a
year before it becomes part of the National Record Center archives.
If this is the case, you contact the orderly room, First Sergeant or
Sergeant Major in charge of where you separated or retired and
request a copy directly from your final base.
Already Have a VA Loan? - Is it possible to use my VA eligibility
more than once?
Check with your lender about interest-rate reduction refinancing on
your existing VA loan. This is a great advantage and there's no need
to re-establish VA loan eligibility. Instead, ask your lender to use
the VA's "email confirmation procedure". You may also re-use your VA
loan eligibility for another VA loan. The requirement here includes
having completed payments on the previous note, and you must no
longer own the property. When applying for re-eligibility, include
copies of the paperwork that proves your old VA loan has been paid
off-a "paid-in-full" letter from your bank, or a copy of the "HUD-1
A One-Time Deal / What is the one-time exception for renewing VA
A VA certificate of eligibility is renewable on a one-time basis.
You qualify if the existing VA loan is paid in full, but you still
own the property. Under the rules, you ordinarily must prove the
property has been sold, but thanks to the one-time exception you may
renew the VA certificate of eligibility. All you need to do is
complete VA form 26-1880 and send it to the nearest VA Eligibility
Center. Remember that getting released from liability for a VA loan
or having a debt waived by the VA is not the same as paying off the
loan. In that case you'll have to pay back the government's loss.
Once that is done, the certificate of eligibility may be renewed.
Partial Eligibility - Can I get eligibility for another VA loan even
though I am still working on the first one?
If you have an existing VA loan, you may still be able to get VA
loan eligibility for second loan. A VA certificate of eligibility
may be available for any unused amount of what you are entitled to
receive. You'll have to negotiate a downpayment with the lender, and
your leftover eligibility may not be sufficient for the entire
amount of the second loan. Partial eligibility is sometimes
complicated, and it's best to get the advice of a VA rep before
filling out any paperwork.
VA Loans and Rental Properties - Can I use my VA loan to buy a
The idea of buying a building intended as a rental property is
sound-but VA mortgages aren't intended for this purpose. If you buy
a home with a VA home loan, you must certify that you intend to
"personally" live in the house. There are naturally exceptions made
for houses that are in the building stages when the sale is made,
but the general rule is you must occupy the house within sixty days
of the loan closing. The occupancy requirement applies to all VA
guaranteed loans except one; the Interest Rate Reduction Refinancing
Loan or IRRRL. For these loans, the veteran is required to certify
that the dwelling was previously occupied as the home.
Bankruptcy and VA Eligibility - What happens if I file bankruptcy
and wish to buy another home at some point?
Veterans who file for bankruptcy are still allowed to use a VA home
loan if they are eligible. Unfortunately the process does require a
waiting period. You are allowed to purchase another home two years
after the "discharge date" of your bankruptcy. Keep in mind that the
filing date does not factor in-you must wait the two years after
bankruptcy has been discharged. Once you are eligible to buy another
home, the usual
credit and income requirements apply.
VA Loans and Your Debt Ratio - How is my VA home loan eligibility
To qualify for a VA home loan, you must fall into a certain debt
ratio. Your income, credit card debts and the new indebtedness
created by the VA mortgage are all tallied up to see where you land
in terms of debt. The maximum debt ratio you may have and still
qualify for a VA home loan is 41%. This is only one factor used to
determine eligibility, the others include your reliable income and
credit rating. If you are considering applying for a VA home loan,
you may wish to make an appointment with a financial planner and
debt counselor to see how you might improve your standing in advance
of the application process.
The VA Loan for Home Equity Refinancing - Can I refinance with the
" If you own a home and are considering refinancing, VA refinancing
may be just what you need. Under the terms of VA refinancing, your
current real estate debt is paid out of the proceeds of a new VA
mortgage. The requirements? The same borrower must use the same
property as before. This type of refinancing is also known as a
'Cash Out"" refinance, and is only good for homes that are used as
the owner's residence. Refinancing is available for up to 90% of the
appraised value plus all closing costs in many cases. Your home must
have enough equity to cover the loan. These terms may not be
available in all states, depending on local lending laws. Check with
your local VA rep to learn more."
What VA Loans Are Used For - Am I limited to buying an existing home
with a VA loan?
A VA home loan has more flexibility than you might think. While many
use this benefit to purchase existing homes, there are many other
applications. Did you know you a VA home loan may be used to
purchase and improve a home at the same time? You may also use a VA
loan to improve your existing home by increasing energy efficiency.
There is also a provision for people to use a VA loan to purchase a
manufactured home and lot, under the right conditions. There are
many applications for a VA home loan, sometimes all you need to do
Does the VA Charge A Fee? - Are there fees associated with my VA
There is a "VA funding fee" required by law. A first-time buyer will
pay a little over two percent for a 'no money down' loan, and a
second time buyer's fee is just above three percent. The reason for
the fee includes the idea that the veteran is reducing taxpayer
burden by contributing to the cost of his VA mortgage. The higher
fee for second-time borrowers presumes that there is equity in the
home, or the borrower has had plenty of time to save in order to pay
for the extra percentage. There is also a fee for VA refinance
loans, and they fall within the same general price guidelines; just
above two percent for first-timers and just above three percent for
those who borrow again.
VA Fees Part 2 - Who is exempt from paying the VA funding fee?
While there is a funding fee for a VA home loan, some people are
exempt from paying. If you are a veteran getting disability
compensation for service-related medical issues, or are entitled to
get compensation if you aren't drawing retirement pay, you are
exempt from the VA funding fee for your VA home loan. Also,
surviving spouses of those who died in the service, or from service
related disabilities are also exempt. It doesn't matter in this case
whether the spouse has any of their own entitlements. Remember that
the VA has the last word on who is exempt, and some issues may be
dealt with on a case-by-case basis. If you have any doubts, ask your
local VA rep to review your service records (or your spouse's
records) and get a determination from the VA.
Co-signers on VA Loans / Can I bring on a co-signer on my VA home
It's true that the legally married spouse of a military member or
veteran can co-sign a VA loan. There is no "penalty" for doing so,
the veteran loan is still fully guaranteed by the VA. Two unmarried
military members are also able to co-sign on a VA loan with the same
results. When a military member or veteran wants to bring an
unrelated, non-military cosigner, the VA allows this with one major
exception. The VA guarantee is limited to the amount of the
veteran's interest in the property. Some companies won't allow these
types of "mixed" loans, so you may have a bit of shopping around to
do before finding a lender willing to work with you. If you find
yourself in this position, give yourself plenty of extra time to
hunt for the right lender.
The Veterans Benefits Act of 2004 - How does the Veterans Benefits
Act change my loan process and entitlements?
The Veterans Benefits Act of 2004 made many changes to the VA loan
process. If you haven't had to get eligibility or otherwise deal
with the VA for a loan since the act passed, you may be surprised
the changes. One of the major differences; the maximum guaranty
amount of $60,000 has been modified. Now, for qualifying loans in
excess of $144,000, the maximum is a sum equal to 25 percent of the
Freddie Mac conforming loan limit, which is determined under the
Federal Home Loan Mortgage Corporation Act. If you feel your VA
mortgage may be affected by changes created by the Veterans Benefits
Act, contact your lender for more information.
Fair Housing - I think I may be encountering discrimination in my
search for a home. Can the VA help?
Federal law requires lenders who participate in VA home loans to
obey Fair Housing Laws. The law prohibits a great many things
including refusal to negotiate, false claims that a residence is
sold or otherwise unavailable, and discrimination in financing.
Chances are you won't be confronted by these problems, but in the
event you do experience something you perceive to be in violation of
Fair Housing laws, you can report the activity to your local VA
office. The local office will investigate your complaint, which you
file by filling out VA Form 26-8827, Housing Discrimination
I Can't Find A House - Do I have any alternatives?
Those with VA loan eligibility or pre-approval may, depending on the
location, have trouble finding new homes for sale. Fortunately,
there are alternatives. In many areas, the VA can offer repossessed
homes available for purchase to qualified buyers. You may also wish
to inquire about state programs. Much the same as your veteran
educational benefits, individual states offer veteran programs
independently of the your federal benefits. Contact the VA office in
your area to learn what may be available. Every state has different
options, you may find just what you are looking for! Don't forget
that the qualifications and requirements may also differ from
VA Foreclosures - Can I use a VA loan to buy a repo house? Does the
VA have any such homes?
It's true, the VA does get control of properties with VA loan
foreclosures. VA foreclosures are offered to the public in the same
manner as repossessed HUD and USDA Development homes. If you are
interested in one of these foreclosed single family houses, check
the government website http://www.homesales.gov/ to see what might
be available in your area. There are many different agencies
offering homes on the website. Eligible buyers should contact a
broker to have the Offer to Purchase And Contract of Sale VA form
completed and submitted. All the routine eligibility and credit
terms apply, as with any housing purchase. Check with your lender if
you are unsure of the terms and conditions of purchase.
Improving Credit - How can I help myself before applying for a VA
Because your VA loan eligibility depends on your debt ratio, it's a
good idea to start thinking about fixing your credit long before
actually filling out loan paperwork. The best way to help yourself
out is to follow the advice of a credit counselor, but you can also
take steps on your own to increase your eligibility for a VA home
loan. Eliminate as much credit card debt as possible. If you can get
yourself down to a single card and stay that way for six months, you
will be well on your way to improving your debt ratio and your
credit rating. Remember that the maximum debt ratio allowed
approval is 41%, and that your credit rating is also a factor. If
you are within a few months of paying off a major debt such as an
automobile loan, do so as quickly as possible. You'll most likely
need to allow for credit reporting agencies to "catch up" with your
newly paid off cards and loans.
VA Homebuyer's Help? - What sort of advantages or help does the VA
offer in the homebuying process?
When applying for a VA home loan there are some advantages to having
the VA on your side during the home buying process. Did you know
that VA loans offer limitations on closing costs? The VA also offers
leniency to qualified VA borrowers who are having temporary
financial problems. Other benefits of a VA home loan include long
terms of repayment, prepayment rights (with certain guidelines) and
under the right conditions, no downpayment required. You are also
entitled to get an accurate assessment of the reasonable property
value of your proposed purchase. These are just a handful of the
added benefits of applying for a VA home loan.
Homebuyer's Help Part 2 - Will the VA give me help if my property is
poorly built or defective?
The VA has a great many ways to assist those seeking a VA mortgage,
but there are also restrictions. When you purchase a home using a VA
home loan, the VA does not offer guarantees that your home is free
from defects. While the VA does conduct an appraisal of the
property, this should not be misconstrued as an 'inspection' or
approval of the condition of the property. The VA does not order
builders to correct problems or defects in the construction of your
home. It's the buyers responsibility to seek expert advice about the
condition of a property before purchase. Additionally, the VA cannot
offer legal counsel of any kind. The buyer is responsible for being
informed about rights and responsibilities with regard to new
property purchases. When in doubt, hire a lawyer or an expert in
"Farm Loan"? - Can I buy a farm with a VA loan?
A veteran generally cannot get a VA loan to purchase a farm with one
notable exception. If the farm has a residence where the veteran
intends to live. There is no 'farming requirement' for this kind of
purchase, but if the veteran does intend to operate a farm business
as a major source of income for loan qualification purposes, it's
required to show that the business can turn a profit. There are
other options available to veterans who wish to operate a farm. The
Farmers Home Administration does show preference to veterans, and
can be used as a way to finance veteran-owned farm operations.
Foreign Purchases - Can I purchase outside America?
The VA does not allow veteran mortgages for properties outside the
United States. The VA does allow purchases in "American territories
and possessions". These areas include Puerto Rico, Virgin Islands,
American Samoa , Guam, and the Northern Mariana Islands. If your
proposed purchase is in one of these areas, you should be able to
apply in the usual ways, but check with your VA rep for any special
requirements or conditions based on the laws which cover lending in
those territories. (Our company, www.valoans.com, only originates VA
home loans for properties in the United States.
What If I Die Before Paying Off My VA Loan? - What if I die before
paying off my VA loan?
Unless mortgage life insurance is purchased, the responsibility of a
veteran mortgage passes to the spouse or the veteran's estate in the
event of his or her death. There is a continued obligation to make
payments, but don't forget the VA's "Leniency Policy" with regard to
forbearance for qualified borrowers who fall on temporary hard
times. Mortgage life insurance can take care of this issue once and
for all, but it is not offered through the VA. You'll need to find a
qualified private insurance company to make these arrangements. The
terms of such insurance may vary from agency to agency.
Selling My VA Loan Property - Once I sell my property, am I released
from my VA loan obligation?
Some people may assume that selling the property purchased with a VA
loan releases them from obligation to the VA loan. This is not
automatic! The borrower must notify either the VA or the lender and
request that liability be transferred to the new owner. The borrower
needs to request a 'release from liability" notice from the VA.
There is an exception to this policy for those with loans closed
before March 1, 1988. In these cases no notification is required,
but it is a very good idea to request a release from liability from
the VA anyway.
Mortgage Payments - What happens if my mortgage is sold to another
Chances are you will make payments to different lenders over the
course of your VA mortgage. Selling mortgages from lender to lender
is common, and sometimes a VA mortgage payment is sent to the old
loan holder because notification of the new owner of your loan and
your payment became crossed in the mail. If this happens, you may
receive a notice of non-payment from the new loan holder. Don't
delay in contacting the new owner of your VA mortgage to straighten
up the problem. While it is technically up to the two lenders to fix
the matter, your credit rating and payment schedule could be
affected if you don't act accordingly.
Construction loans are story loans. That means that the lender has
to know the story behind the planned construction before they're
willing to loan you money. Because it's a story loan, it's not going
to be standardized like mortgage loans underwritten to Freddie Mac
or Fannie Mae guidelines. That said, there are some common features
to a construction loan. Construction loans typically require
interest-only payments during construction and become due upon
completion. Completion for homeowners means that the house has its
certificate of occupancy.
Construction loans are usually variable-rate loans priced at a
spread to the prime rate or some other short-term interest rate.
You, the contractor and the lender establish a draw schedule based
on stages of construction, and interest is charged on the amount of
money disbursed to date.
Another variable in construction loans is how much of the project
cost the lender is willing to lend. If you already own the land,
then that can be considered as equity on the construction loan.
Many homeowners use construction-to-permanent financing programs
where the construction loan is converted to a mortgage loan after
the certificate of occupancy is issued. The advantage is that you
only have to have one application and one closing.
Depending on your view on interest rate trends, you could also
purchase a rate-lock agreement valid through the expected completion
of the construction. Just make sure you allow for the inevitable
A construction loan, unlike a mortgage, isn't meant to be around for
a long time. If you're taking out a $200,000 construction loan for
six months and you pay an extra 0.5 percent on the loan, it costs
you an additional $250. (Assumes an average $100,000 loan balance
over a six-month construction period.)
You may be willing to pay a higher rate on the construction loan if
you're doing construction-to-permanent financing and can get better
mortgage terms or a longer, better rate lock from that lender.
Financing Manufactured (Mobile) Homes
Under the Title I program, approved lenders make loans from their
own funds to eligible borrowers to finance the purchase of a
manufactured home and/or lot, and FHA insures the lender against
loss if the borrower defaults. Credit is granted based upon the
applicant's credit history and ability to repay the loan in regular
Title I manufactured home loans are not Government loans or grants,
and are not low interest rate loans. The interest rate is fixed and
is generally based upon the prevailing market rate in the area at
the time the loan is made. FHA does not lend money.
Purpose of the Loan
A Title I loan may be used for the purchase or refinancing of a
manufactured home, a developed lot on which to place a manufactured
home, or a manufactured home and lot in combination. The home must
be used as the principal residence of the borrowers.
Maximum Loan Amount
· manufactured home only - $48,600
· manufactured home lot - $16,200
· manufactured home & lot - $64,800
The dollar limits for lot loans and combination loans may be
increased up to 85 percent in designated high-cost areas. For
information on high-cost area limits, contact the local HUD
Maximum Loan Term
· 20 years for a loan on a manufactured home or on a single-section
manufactured home and lot.
· 15 years for a manufactured home lot loan.
· 25 years for a loan on a multi-section manufactured home and lot.
Manufactured homes are usually purchased through dealers or
retailers that sell the homes. The names of lenders in your area
which specialize in financing manufactured homes can be obtained
from local retailers. These retailers are listed in the yellow pages
of your telephone directory. They have the required application
forms. FHA neither loans money nor gives grants to purchase homes.
Also, manufactured homes must comply with the National Manufactured
Home Construction and Safety Standards. The approved FHA lender can
explain the mortgage credit and income eligibility requirements to
qualify for a loan.
HUD provides two types of consumer protection. The borrower must
sign a HUD Placement Certificate agreeing that the home has been
installed and set-up to their satisfaction by the retailer before
the lender can give the loan proceeds to the retailer. After moving
in, the borrower can call HUD at (800) 927-2891 to get assistance
about the problems with construction of the home.
Eligible Borrowers Must:
· Have sufficient funds on hand to make the minimum required
downpayment of 5 percent.
· Be able to demonstrate that they have adequate income to make the
payments on the loan and meet their other expenses.
· Intend to use the manufactured home as their principal residence.
· Have a suitable site on which to place the manufactured home. The
home may be placed on a rental site in manufactured home park, or on
an individual homesite owned or leased by the borrowers.
An Eligible Manufactured Home Must:
· Meet the National Manufactured Home Construction and Safety
· Carry a one-year manufacturer's warranty if it is a new
· Be installed on a homesite that meets established local standards
for site suitability and has adequate water supply and sewage
disposal facilities available.
The proceeds of a Title I manufactured home loan may not be used to
finance furniture (for example, beds, chairs, sofas, lamps, rugs,
etc.). However, built-in appliances and equipment and wall-to-wall
carpeting are eligible for financing.
Equal Opportunity in Housing
The Fair Housing Act prohibits discrimination in housing and related
transactions--including mortgages and home improvement loans.
Lenders may not deny funds or offer less favorable terms and
conditions in lending on the basis of the borrower's race, color,
religion, sex, national origin, familial status (i.e., the presence
or number of children in a household) or disability. In addition,
lending decisions may not be based on the race, color, sex,
religion, national origin, familial status or disabilities of
persons associated with the borrower or with the area surrounding
the property. If you believe you have been the victim of
discrimination in mortgage lending on one of the prohibited bases,
you may file a fair housing complaint by contacting a local fair
housing advocacy group, the Office of Human Rights for your state or
local government, or by calling the nati
How much money can I borrow?
The amount of allowable money borrowed is contingent on many
factors. The strength of credit history, previous credit limits,
income, residence status, business gross sales, and your time in
business are some of the major factors that contribute to acquiring
a commercial loan.
Is a line of credit better than a loan?
A line of credit can be much better during the initial stages. The
payments are lower and it gives the borrower more flexibility.
Monthly payments on lines of credit are usually 1% to 2% of the
balance. Monthly payments on a loan will vary depending on the terms
lasting from 24 to 84 months.
What qualifies as a business loan?
A business loan requires a minimum of 24 months in business with an
average of gross sales of $150,000 or higher. Business credit does
play a role, but the overall credit of all owners is the deciding
Do I need to be currently employed to get a business loan?
Though current income is one of the factors contributing to getting
approved, some lenders will not require you to be currently
employed. Some lenders will dedicate their focus more upon the
business a person is looking to start or buy.
Do I have to put my home up for collateral as part of the financing?
If you have equity in your home, then it will be attached; but, it
is not warranted for your home to be contributed for collateral.
Lenders are looking for veritable cash flow and not collateral
How much money do I have to contribute towards the purchase price?
Lenders want to see the business buyers take some risk as well;
though the minimum down is usually 10% to 15%, putting down 20% is
more common and desired by most lenders. Down payments can come from
savings, equity from a home, retirement funds, etc.
How long does it usually take to get financing?
Approval normally takes place within a week and the funding is
provided within the first month of approval.
Is cash flow or adjusted net income important?
Lenders tend to look more upon positive cash flow or adjusted net
income than equity or collateral. A "positive net income" factors in
the owner's salary, net income, and depreciation. Revenue and cash
trends over the previous three years are highly scrutinized by
A Good Faith Estimate must be provided by a mortgage lender or broker
in the United States to a customer, as required by the Real Estate
Settlement Procedures Act (RESPA). The estimate must include an
itemized list of fees and costs associated with your loan and must
be provided within three business days of applying for a loan.
These mortgage fees, also called settlement costs or
cover every expense associated with a home loan, including
inspections, title insurance, taxes and other charges.
A good faith estimate is a standard form which is intended to be
used to compare different offers (or quotes) from different lenders
The good faith estimate is only an estimate. The final closing costs
may be different – sometimes very different.
 Fees and Charges
The fees included within a good faith estimate fall into six basic
Fees to be paid in advance
The following is a list of the typical charges. Each charge starts
with a number – the same number is the number of the charge on a
HUD-1 Real Estate Settlement Statement. This makes it easier to
compare the charges you are looking for on your good faith estimate
to the HUD-1.
800 ITEMS PAYABLE IN CONNECTION WITH LOAN:
801 - Loan Origination Fee
This fee is a charge for originating or creating the loan
802 - Loan Discount
This is an upfront charge paid to the lender to get a lower mortgage
rate – the same as “buying the rate down”
803 - Appraisal Fee
This is the cost of the independent appraisal. It is usually paid by
804 - Credit Report
This is the cost of the credit report
805 - Lender's Inspection Fee
This is the lender’s cost of inspecting a property – some may double
check the appraisal provided by an independent appraiser
808 - Mortgage Broker Fee
This is the upfront charge that a mortgage broker charges. Brokers
can also earn a “rebate” from the lender which is not listed here
809 - Tax Related Service Fee
Lender fee, usually small, for handling tax related matters
810 - Processing Fee
This is the charge for processing the loan – collecting your
application, running credit, collecting pay stubs, bank statements,
ordering appraisal, title, etc.
811 - Underwriting Fee
This is the cost of the loan underwriter (approver)
812 - Wire Transfer Fee
This is the cost of wiring the money around, which is usually done
900 ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE
901 - Interest for days X $ per day
This is your prepaid interest for your mortgage loan.
902 - Mortgage Insurance Premium
This is the prepaid mortgage insurance premium, if you have one.
This is the insurance premium some lenders charge for loans with
903 - Hazard Insurance Premium
This is your home’s hazard insurance being prepaid.
905 - VA Funding Fee
This is the Veterans Administration funding fee, which is something
you will not incur unless you go through a VA program.
1000 RESERVES DEPOSITED WITH LENDER
1001 - Hazard Insurance Premiums # months @ $ per month
This is any prepayment of your future hazard insurance expense
1002 - Mortgage Ins. Premium Reserves months @ $ per month
This is any prepayment of your future mortgage insurance expense
1003 - School Tax months @ $ per month
This is any prepayment of your future school tax expense
1004 - Taxes and Assessment Reserves months @ $ per month
This is any prepayment of your future tax expenses, such as property
1005 - Flood Insurance Reserves months @ $ per month months
This is any prepayment of your future flood insurance expense
1100 TITLE CHARGES
1101 - Closing or Escrow Fee
This is the cost of escrow. This is the service of a neutral party
that actually handles the money between all the different parties in
a real estate transaction, including: the lender, the buyer, the
seller, the agents, notary, etc. This is often done by the “Title
Company” – a related entity in the same office that provides title
1105 - Document Preparation Fee
This is the charge for preparing the loan documents. Lenders often
email the loan documents to the escrow company, which in turn prints
them out and reviews them before signing
1106 - Notary Fees
This is the cost of the notary. This is to have all of the legal
documents surrounding this transaction notarized
1107 - Attorney Fees
Any legal charges
1108 - Title Insurance
This is the cost of insuring the title of the property. If there is
a question about title (who really owned the property), after the
transaction is done then this insurance protects the lender from
1200 GOVERNMENT RECORDING & TRANSFER CHARGES
1201 - Recording Fees
This is the cost of updating relevant government records
1202 - City/County Tax/Stamps
Unavoidable government charge
1203 - State Tax/Stamps
Unavoidable government charge
1300 ADDITIONAL SETTLEMENT CHARGES
1302 - Pest Inspection
This is the cost of the pest inspector. Their purpose is to document
the state of the property that the lender is making the loan on.
Lending Statement (reg-Z)
The Truth In Lending Disclosure Statement is neither a contract nor
a commitment to lend.
Your loan officer or mortgage broker is required to provide you with
the Truth in Lending Disclosure Statement within three business days
of the date that you apply for your loan.
The purpose of the Truth in Lending Disclosure Statement is to show
you the estimated total costs of borrowing, the expected payment
amounts over the life of the loan, and other significant features of
Now let's look at the different sections of the Truth in Lending
The Annual Percentage Rate or APR is the cost of your loan expressed
as a yearly rate.
ANNUAL PERCENTAGE RATE
The cost of your credit as a yearly rate
The Finance Charge is the dollar amount the loan will cost you.
The dollar amount the credit
will cost you
The Amount Financed is the amount of credit provided to you or on
The amount of credit
provided to you or on your
The Total of Payments is the amount you will have paid after making
all payments as scheduled.
The amount you will have
paid after making all
payments as scheduled
The purpose of an APR is to allow you to quickly compare the total
costs between competing loans without having to analyze all of the
individual costs within each loan.
A $100,000 30-year fix rate loan @ 7% interest rate with finance
costs of $5,000 = an APR of 7.52%.
While the same loan @ 8% interest rate with finance costs of $4,000
= an APR of 8.44%.
By comparing the APR’s (7.52% and 8.44%.) alone, we can see from our
example that the first loan (7.52% ) initially seems to have a
higher cost. However, because the interest rate is lower, it will
provide a lower total cost to you in the long run. Comparing APR's
on loans is a quick way to get a feel for which loan is the better
The second major section shows you the monthly payments you will
make over the life of the loan.
Truth in lending disclosure statements vary from lender to lender.
Toward the bottom, there are several categories of services on your
statement. Again, these vary from lender to lender. Be sure to ask
about the sections that are checked before you sign.
Pre-Payment Penalty is a penalty that you may have to pay if you pay
the loan off early. Not knowing you have a Pre-Payment Penalty can
be a very costly oversight later on.
Balloon Payments are a lump sum payment due at a specific point in
the loan. A balloon payment may be for the entire balance you owe.
By Law, the lender must disclose this information to you upfront on
this disclosure form.
What is APR?
The annual percentage rate (APR) is an interest rate that is
different from the note rate. It is commonly used to compare loan
programs from different lenders. The Federal Truth in Lending law
requires mortgage companies to disclose the APR when they advertise
a rate. Typically the APR is found next to the rate.
The APR does NOT affect your monthly payments. Your monthly payments
are a function of the interest rate and the length of the loan.
The APR is a very confusing number! Even mortgage bankers and
brokers admit it is confusing. The APR is designed to measure the
"true cost of a loan." It creates a level playing field for lenders.
It prevents lenders from advertising a low rate and hiding fees.
If life were easy, all you would have to do is compare APRs from the
lenders/brokers you are working with, then pick the easiest one and
you would have the right loan. Right? Wrong!
Unfortunately, different lenders calculate APRs differently! So a
loan with a lower APR is not necessarily a better rate. The best way
to compare loans in the author's opinion is to ask lenders to
provide you with a good-faith estimate of their costs on the same
type of program (e.g. 30-year fixed) at the same interest rate. Then
delete all fees that are independent of the loan such as homeowners
insurance, title fees, escrow fees, attorney fees, etc. Now add up
all the loan fees. The lender that has lower loan fees has a cheaper
loan than the lender with higher loan fees.
The reason why APRs are confusing is because the rules to compute
APR are not clearly defined.
What fees are included in the APR?
The following fees ARE generally included in the APR:
· Points - both discount points and origination points
· Pre-paid interest. The interest paid from the date the loan closes
to the end of the month. Most mortgage companies assume 15 days of
interest in their calculations. However, companies may use any
number between 1 and 30!
· Loan-processing fee
· Underwriting fee
· Document-preparation fee
· Private mortgage-insurance
The following fees are SOMETIMES included in the APR:
· Loan-application fee
· Credit life insurance (insurance that pays off the mortgage in the
event of a borrowers death)
The following fees are normally NOT included in the APR:
· Title or abstract fee
· Escrow fee
· Attorney fee
· Notary fee
· Document preparation (charged by the closing agent)
· Home-inspection fees
· Recording fee
· Transfer taxes
· Credit report
· Appraisal fee
An APR does not tell you how long your rate is locked for. A lender
who offers you a 10-day rate lock may have a lower APR than a lender
who offers you a 60-day rate lock!
Calculating APRs on adjustable and balloon loans is even more
complex because future rates are unknown. The result is even more
confusion about how lenders calculate APRs.
Do not attempt to compare a 30-year loan with a 15-year loan using
their respective APRs. A 15-year loan may have a lower interest
rate, but could have a higher APR, since the loan fees are amortized
over a shorter period of time.
Finally, many lenders do not even know what they include in their
APR because they use software programs to compute their APRs. It is
quite possible that the same lender with the same fees using two
different software programs may arrive at two different APRs!
Use the APR as a starting point to compare loans. The APR is a
result of a complex calculation and not clearly defined. There is no
substitute to getting a good-faith estimate from each lender to
compare costs. Remember to exclude those costs that are independent
of the loan.