Pre-approvals and pre-qualifications are the same, right?
Wrong. A pre-approval involves a much more complete process than a pre-qualification. A pre-qualification is the initial step in the mortgage process. A borrower will supply an overall financial picture to their Mortgage Loan Originator. This includes information on their debt, income and assets. Once cleared, the borrower will then be provided a "pre-qual letter. A pre-qualification is short of approval because it doesn't take account of the credit history of the borrower. A pre-approval requires all the steps of a full approval, except for the appraisal and title search. The borrower will complete an official mortgage application and then supply all the necessary documentation so that the lender can perform an extensive check on his/her current credit rating and financial background. What's the benefit of getting a pre-approval? It can put you in a much better negotiating position, similar to that of a cash buyer.
What higher power determines interest rates?
Interest rates are mostly influenced by the financial markets . They can change daily - or even multiple times with the same day. Different economic indicators in the financial markets cause this.
I should "lock" my rate? Whatever do you mean?
A rate lock gives you, the borrower, protection from financial market fluctuations that could affect the range of your interest rate. It's a contractual agreement between the lender and buyer. There are four major components to a rate lock: loan program, interest rate, points and the length of the lock. If your interest rate range is locked and there are no subsequent changes to your loan, the interest rate range on your application generally remains the same. However, if changes are made to your loan, your final interest rate at closing may be different.
Why are you saying I'm "floating" when my feet are still on the ground?
Floating means that your rate is not locked and is fluctuating with the up and down movements of the market. The benefit of this is if interest rates decrease, you will have the option of locking in at a lower rate.
What is a FICO score?
FICO scores are the credit scores that the majority of lenders use to determine your credit risk. This score boils your credit history down to a three-digit number that tells a lender whether you're creditworthy. The two biggest factors in computing a FICO score are past payment history and outstanding debt. The average FICO score falls between 600 and 800, the median being 723. Your FICO score makes a very big difference in terms of what interest rates you are offered on a mortgage.
What is an APR?
APR (Annual Percentage Rate) measures the net effective cost of borrowing. It takes into account some costs of getting the loan (including any applicable points), most loan fees and mortgage insurance. The APR is the most consistent means of determining price disparities between lenders.
What is PMI? Can I get rid of PMI on my loan?
PMI stands for Private Mortgage Insurance. When applying for a home loan, a lender will typically require that a borrower provides a 20% down payment on the home. If the borrower is unable to put down a minimum of 20%, the lender will usually look at the loan as a riskier investment and will require a PMI payment from the borrower. The PMI payment is usually paid monthly along with the overall mortgage payment to the lender. To get rid of the PMI on the loan, the borrower can contact their lender and ask that it be removed after they pay down enough of the principal (to cover the 20%). Another way to avoid the PMI payment is to take out a smaller loan to cover the amount of the 20% down (usually at a higher interest rate).
What is a good faith estimate?
This is a list of settlement charges. Within three business days of receiving the loan application, the lender is obliged to provide the good faith estimate to the borrower. The good faith estimate gives the borrower the opportunity to review associated costs on the loan before proceeding.
Is it okay if I take care of all that homeowners insurance stuff after closing?
No! Proof of homeowners insurance is required before you can close your loan. In most cases, you'll need to present an insurance binder and pay for the full first year of insurance coverage.
How is LTV (or loan-to-value ratio) calculated?
The loan-to-value (LTV) ratio is calculated simply by dividing the fair market value of your home by the amount of your home loan.
How is DTI (or debt-to-income ratio) calculated?
The debt-to-income (DTI) ratio calculated by dividing your monthly debt by your monthly income. To start, first add up what you spend each month on the following: mortgage or rent, minimum credit card payments, car loan, student loans, alimony/child support payments, and other loans you may owe. The total amount is what you spend each month on debt. The next step is to calculate your monthly income by adding up your yearly: gross income, bonus or overtime, alimony/child support, and any other income. Once you have this amount then divide your yearly income by 12 to determine your monthly income. Now all that's left is to divide your monthly debt by your monthly income. While the base line changes, the typical ratio of what's considered to be the healthiest debt load for the majority of people is 38% or less.