Your Most Frequent Finance Questions Answered

What is the difference between fixed rate and variable rate mortgages?

A fixed rate mortgage is a loan where the principle and interest payment never change during the life of the loan.

A variable rate mortgage is a loan where the interest rate can change periodically. The changes in the interest rate are tied into the market rates that exist at the time the rate is subject to change. They usually offer lower interest rates than fixed rate mortgages, but can adjust upward if interest rates go up. There is a predefined cap which defines how high the interest rate can adjust.

Fixed rate mortgages are beneficial to those who are on a fixed income, adverse to interest rate change and those who prefer fixed payment schedules.

Adjustable rate mortgages are advantageous for those who do not plan to stay in their home for a long time, for those borrowers who do not qualify at higher fixed interest rates, and those who can financially handle fluctuating payments.

How do adjustable rate mortgages work?

There are many types of adjustable rate mortgages, but all have some common features.

One common feature of adjustable rate mortgages is an interest rate change that occurs after a stipulated number of payments have been made. The interest rate can increase or decrease depending on how the new interest rate is calculated. Typically, the interest rate change is based upon a predetermined index value and a margin.

If a mortgagor currently has an interest rate that is pending adjustment, the new rate would be calculated by adding the current index rate and a margin. For example, if the mortgagor's current rate was 6.000% with a 2.000% margin, the new rate would be determined by adding the current index rate (5.000% as an example) to the margin. In this example the new interest rate would be 7.000%.

The maximum amount the interest rate can change during any adjustment period is usually fixed. This maximum adjustment is called the "cap." Adjustable rate mortgages also have a lifetime cap, preventing the interest rate from exceeding a predetermined rate.

What are escrow accounts and how much do I need in my escrow account?

Escrows are payments made by a mortgagor to a mortgagee for the purpose of paying the mortgagor's taxes, insurance, and other payments associated with home ownership. The mortgagee is responsible for the timely disbursement of escrow funds to pay the mortgagor's bills as they come due.

Usually, a mortgage company collects funds for placement into the mortgagor's escrow account with the mortgagor's periodic payment for principal and interest. An escrow account has sufficient funds if there is enough to pay all bills when they come due.

It is common practice for mortgage companies to hold an "escrow cushion" for a mortgagor. The "cushion" is kept by the mortgage company to assure that if the cost of any escrowed item were to increase in the future, there would be sufficient funds to pay all bills as they come due.

What documents will I need to give the lender before closing a loan?

You will need these four documents to give to the lender before closing a loan:

• Fully ratified/executed sales contract on purchase loans.
• A termite report for the house.
• Homeowners insurance policy properly listing the lender in the Mortgagee Clause.
• Any outstanding items requested by the lender.

What's included in closing costs?

Closing costs are divided into three categories

•  Lender fees: points, appraisal, credit report, underwriting, settlement and tax service fee
• Prepaid items:interim interest, real estate taxes and escrow, insurance premiums and escrow
• Settlement costs: title insurance, settlement/attorney fees, city/county/state taxes, recordation and messenger fees

What is the difference between a Mortgage Broker and a Lender?

A mortgage broker is an independent contractor that offers loans from multiple lenders or wholesalers. The broker usually takes your application to process the loan. Once your application is complete, the Lender underwrites the loan and funds once you are approved.

What documents will I need when I apply for a loan?

To get the ball rolling and to make the entire application process much smoother, you can jump start on organizing a document checklist before you speak with your mortgage professional. Please remember to make a copy of everything, and keep all your original documents in a safe place. Listed below are some documents you will need.

• Employment Information: To verify your employment, your lender may require the names, addresses and phone numbers of all your employers in the last two years. If you are self-employed, your business records and tax returns for the last three years are required.
• W-2 Forms: W-2 Forms for the past two years.
• Pay Stubs and Additional Income: Save your pay stubs for at least 30-days before your mortgage application. Documentation of any additional income such as Social Security, pension, interest or dividends, rental income, child support, alimony and self-employment income is also required.
• Federal Income Tax Returns: If self-employed, or more than 25% of your income comes from commission, overtime or bonuses, you will need to provide complete copies of federal income tax returns you filed for the two most recent years.
• Account Statements: You may need to provide statements from all of your accounts in the last two years to verify the funds available for your down payment, such as checking, savings, mutual funds, money markets, certificates of deposits, and 401k or other retirement accounts.
• Current Debts: Be prepared to provide the account numbers, current balances and the minimum monthly payments of all credit accounts, such as loans, credit cards, child support and other payments you make each month.

How can I avoid escrows?

Some lenders will waive escrow requirements if you have made a down payment of 20% or more. Talk to your lender first to find out their exact policy on this issue.

Why do Lenders pull credit?

Your credit history will show the debts you owe and your ability to pay them. This helps to determining your credit worthiness. To get your credit report, a lender will order a credit report from a credit bureau. The credit bureau will then return your information to the lender. There are three main credit bureaus in the United States: Equifax, Trans Union and Experian.

How long does the mortgage process take?

Processing and closing a mortgage usually takes between seven and 30 calendar days.

When should I apply for a mortgage?

Most borrowers apply once they have selected a property. Or you can get pre-qualified by Wall Street Financial Corp. so you can know how much you can afford before you start looking for a house.

What does “pre-approved” mean?

We have approved your loan based on your credit criteria and debt-to-income ratio. That approval is good for 90 days.

What are the closing costs for a refinance or purchase?

Closing costs vary depending on the purchase price of your new home or your loan amount, but generally run 3-5% of your total loan.

What is Truth-In-Lending Disclosure and why do I receive it?

The Truth-In-Lending disclosure is designed to give you information about the costs of your loan so that you may compare these costs with those of other loan programs or lenders.

What is the Annual Percentage Rate (APR)?

The Annual Percentage Rate (APR) is the cost of your credit expressed as an Annual Rate. It is commonly used to compare loan programs from different lenders.

Why is the APR different from the interest rate for which I applied?

The APR is computed from the Amount financed and based on what your proposed payments will be on the actual loan amount credited to you at settlement. For a $50,000 fully amortizing loan with $2,000 Prepaid Finance Charges, a 30 year term and a fixed interest rate of 12%, the payments would be $514.31 (principal & interest). Because the APR is based on the amount financed ($48,000), while the payment is based on the actual loan amount given ($50,000), the APR (12.553%) is higher than the interest rate.

What is the Finance Charge?

The Finance Charge is the cost of credit expressed in dollars. It is the total amount of interest calculated at the interest rate over the life of the loan, plus Prepaid Finance Charges and the total amount of any required mortgage insurance charged over the life of the loan.

What is the amount financed?

The loan amount less the Prepaid Finance Charges paid at closing. Prepaid Finances include items paid at or before settlement, such as loan origination, commitment or discount fees (“points”), adjusted interest, and initial mortgage insurance premium.

Does this mean that I will get a smaller loan than I applied for?

No. If your loan is approved in the amount requested, you will receive credit toward your home purchase or refinance the full amount for which you applied.

Is there a Loan Limit on FHA?

FHA maximum loan amounts are set by HUD for every county in the United States. Maximum loan amounts vary from one county to another. Check with your Loan Consultant for the maximum Mortgage amount allowed in the county you are considering purchasing a home in.

Is Mortgage Insurance Required on FHA Loans?

FHA is a government insured program with a unique mortgage insurance premium on the 203(b) program. An upfront premium of 1.50% of the loan amount is paid at closing and can be financed into the mortgage amount. In addition there is a monthly MIP amount included in the PITI of 0.50%. Condos do not require up front MIP, only monthly MIP.

Can I use Gift Funds for the Down Payment?

One of the most popular aspects of FHA financing is the ability to receive your down payment as a gift. It just needs to be from a relative. The down payment can be 100% gift funds. This is one of the key benefits to the FHA program. Most conventional mortgages do not allow 100% gift funds. Generally the borrower must have 5% of the funds. Verification of the source of gift money is required. It is necessary that the gift funds be deposited in the borrower's account, or in an escrow amount, prior to underwriting approval. Proof of transfer of deposit is required.

Gift donors are restricted primarily to a relative of the borrower. They can also be certain organizations, such as a labor union or charitable organization. Contact your Loan Consultant for complete information.

What are the Rules Regarding Bankruptcy?

FHA may have the most lenient policies towards bankruptcy, but you still must have a valid reason and re-established credit. Generally, a bankruptcy will not necessarily disqualify a potential borrower. Guidelines are as follows:

• Chapter 7: Two years must have passed since the bankruptcy was discharged. (Note: Discharge, not Filing Date). The borrower must have re-established good credit without delinquencies for two years (or has chosen not to incur new credit obligations), and has demonstrated an ability to manage financial affairs. If the borrower does not incur new credit, such things as Car Insurance, Telephone, Cable, Utilities, Medical Payments, etc. will be used to demonstrate re-established credit.

• Chapter 13: A Chapter 13 Bankruptcy, often referred to as a wage-earner plan, allows arrangements to be made for some or all debts to be paid off over a number of years without the person liquidating assets. It can be viewed more favorably than a Chapter 7 or Chapter 11 Bankruptcy, where you walk away from debts remaining after liquidation of certain assets. Again, it hinges strongly on the lender and its practices.

A few mortgage programs will allow an opportunity for you to get new financing while you are still in the Chapter 13, others will not and will require a certain period of time to have elapsed after its discharge. Some require that you must have completed the Chapter 13 and re-established credit with institutional lenders, while others do not and appreciate that you have incurred no new debt.

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