FAQ's

Q: How do I know how much house I can afford?

A: We can work with you to get you qualified BEFORE you look for a home. Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend upon your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. 

Q: How do I know which type of mortgage is best for me?

A: There is no simple formula to determine the type of mortgage that is best for you. This choice depends on a number of factors, including your current financial picture and how long you intend to keep your house. Prolending Mortgage and I can help you evaluate your choices and help you make the most appropriate decision. 

Q: What does my mortgage payment include?

A: For most homeowners, the monthly mortgage payments include three separate parts:

• Principal: Repayment on the amount borrowed
• Interest: Payment to the lender for the amount borrowed
• Taxes & Insurance: Monthly payments are normally made into a special escrow account for items like hazard insurance and property taxes. This feature is sometimes optional, in which case the fees will be paid by you directly to the County Tax Assessor and property insurance company. The mortgage payment may also include Private Mortgage Insurance (PMI) if the loan to value is in excess of 80%.

Q: How much cash will I need to purchase a home?

A: The amount of cash that is necessary depends on a number of items. Generally speaking, though, you will need to supply:

• Earnest Money: The deposit that is supplied when you make an offer on the house.  This deposit will be applied towards the money needed at closing.
• Down Payment: A percentage of the cost of the home that is due at settlement
• Closing Costs: Costs associated with processing paperwork to purchase or refinance a house

Q: What are points and is there a specific reason I should pay points?

A: Mortgage points are upfront fees paid at closing, with one point equal to 1% of the loan amount. Paying points can lower your interest rate, which may reduce your monthly payment.

On a 30-year fixed-rate mortgage, paying one point can often lower your rate by about 0.25%, though this varies by market and loan program. The upfront cost is typically recouped over several years through monthly payment savings, making points more beneficial for borrowers who plan to stay in the home long term.

Whether paying points makes sense depends on how long you expect to keep the loan, your cash at closing, and your financial goals. Your loan officer can help you compare scenarios to see if paying points is right for you.

Q: What are debt and income ratios?

A: The Debt Ratio is your total monthly housing expense PLUS any recurring debts (i.e. monthly credit card minimum payment, car payments, or other loan payments) divided by your income. 

The Income Ratio is your total monthly housing expense divided by your gross monthly income (before taxes).  Some conventional programs allow debt ratios to be as high as 50% of your total gross monthly income and FHA can go as high as 56%.  These figures will also depending on the program, down payment, credit rating and your financial strength.
 

Q: What is Private Mortgage Insurance?

A: Private Mortgage Insurance (PMI) is insurance for the Lender in case the borrower defaults on the mortgage and the property goes into foreclosure. PMI is placed on any conventional loan where the loan amount is greater than 80% of the sales price. PMI benefits the borrower by allowing him/her to put a smaller down payment on the home. Therefore the home can be purchased today rather than waiting until more money is saved up for a down payment of 20%. But, there are ways around this on some conventional loans.  Ask me how?
 

Q: How much money do I need for a down payment and closing costs?

A:  Down payment and closing cost requirements vary by loan program, and there are options available with 0% down financing for qualified buyers. Some low- or no-down-payment programs may have slightly higher interest rates or additional requirements, while others allow as little as 3% to 5% down. Closing costs typically range from 3% to 4% of the purchase price, but in many cases, seller contributions can be used to help cover some or all of these costs. Additionally, certain programs allow the down payment and/or closing costs to be covered by gift funds from a family member. A Loan Officer can help you review your options and determine the best program for your situation. 

Q: What is the APR and how does it affect my payment?

A: APR stands for Annual Percentage Rate and represents the total cost of a mortgage loan expressed as a yearly rate. It includes not only the interest rate, but also certain fees and costs associated with the loan, such as origination fees or points.

Because APR accounts for these additional costs, it is often slightly higher than the interest rate. However, your monthly principal and interest payment is based on the interest rate, not the APR.

APR is best used as a comparison tool when evaluating similar loan options, but it should not be the only factor in choosing a mortgage. Your loan officer can help explain how APR differs between loan programs and what it means for your specific situation.

Q: What is the difference between a fixed-rate loan and an adjustable-rate loan?

A: With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM loan will likely change. There are advantages and disadvantages to each type of mortgage, and the best way to select a loan product is by talking to your broker. 

Q: How is an index and margin used in an ARM?

A: An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and a pre-specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR).