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What are the differences between a mortgage prequalification, preapproval and final loan approval?
I hear about these different "ratios" when qualifying for a mortgage. What are front and back end ratios?
What options are there for buyers with no money down and no cash for closing costs?
What is Private Mortgage Insurance(PMI)?
Are there way of avoiding PMI if I can’t come up with a 20% down payment?
What factors should I consider when deciding on renting or buying a home?
What is the difference between APR and the interest rate?
What are points?
Is a "no-cost loan" really no cost?
What does a "rate lock" mean?
What is an escrow account?
What happens when my loan is "sold"?
What is a conventional loan?
What is a conforming loan? What is a non-conforming loan? FHA and VA?
What is a B/C loan?
Who are Fannie Mae, Freddie Mac, and Ginnie Mae, and what do they have to do with home loans?
What is a FICO score?
Why Can my loan be sold? And what happens if my lender goes out of business?
I still don’t understand APR. How is it figured out & why is it different at different banks?
Why Do Mortgage Rates Change?


What are the differences between a mortgage prequalification, preapproval and final loan approval?

Prequalification is the process where the lender will look at a basic copy of your credit report and use the information you supply to determine how much of a mortgage you can afford based on your income. No accounts or employment information is verified. Preapproval occurs when all credit and employment is verified and the mortgage is approved, subject to the appraisal of the property you have chosen to buy. Final loan approval occurs when the property has been appraised, all documentation is in the hands of the lender and all contingencies have been met.  Back to Questions

I hear about these different "ratios" when qualifying for a mortgage. What are front and back end ratios?

Part of the mortgage application process will be the determination of how much house you can afford based on your income. The two ratios that will be computed are the front ratio and the back end ratio.  Front Ratio: The total mortgage payment including principal, interest, taxes and insurance (PITI) as well as any condominium or homeowner association fees divided by your total GROSS income. Traditionally this ratio must be below 28% Example: With a gross income of $4,000 per month, a total mortgage payment (PITI) of $1,000, the front ratio would be 25%. Back End Ratio: The total mortgage payment PLUS any car payments, credit card and any other loan payments divided by your total GROSS income. Traditionally must be below 36%. Example: With a gross income of $4,000 per month, a total mortgage payment of $1,000, a car payment of $200, 1 credit card payment of $60 and 1 credit card payment of $40 for a total of $1,300 with a back ratio of 33%. Back to Questions

What options are there for buyers with no money down and no cash for closing costs?

Actually, very few. Since a mortgage payment will take a good percentage of your income, lenders will want you to be "involved" (meaning having your money involved) from the very beginning. There are options for low down payment (5% or less) mortgages such as FHA mortgages and there is always the possibility that the seller could absorb some of your closing costs (which are usually 3-5% of the selling price) but to buy a home with no cash down is a rare occurance. If you have cash for closing costs, though, and excellent credit, there are new options in the conventional loan arena. Back to Questions


What is Private Mortgage Insurance (PMI)?

One of the most frequently misunderstood aspects of mortgaging a home, especially for first-time buyers, is Private Mortgage Insurance (PMI). The most common misconception is that PMI is a mortgage life insurance policy whereby the mortgage would be paid off should the borrower die. It is not. Instead, PMI is an insurance that most lenders require of all borrowers who put less than 20% down. It's purpose is to protect the lender against losses should the borrower default. Virtually all conventional mortgages with less than a 20% down payment will dictate the inclusion of PMI. FHA mortgages, which are insured by the Federal Government, require a different type of insurance with different coverages. The cost of PMI will depend on a number of factors, including the insurance carrier and the size of the loan, but monthly payments for the insurance will generally fall into the $25 - $100 range for median priced homes. When confronted with PMI for the first time, many buyers will ask "If I'm paying the premium but it is the lender who is protected, what's in it for me?" Simply, the ability to purchase a home with less than 20% down. Lenders have found that those who put down less than 20% are far more likely to default than those who put down more. With the protection of PMI, lenders are able to make more loans (and more buyers are able to buy homes) with down payments as low as 5% or 10%. This is especially important to first-time buyers, where liquid cash for down payments and closing costs is often tight. Obviously, your first goal should be a 20% down payment level since this achieves a number of goals. First, it eliminates the cost of PMI entirely. Second, it lowers your monthly payment (since you have financed less). Third, it allows you to buy more house since the money that would have been for PMI can now be for a higher mortgage payment. Back to Questions

Are there way of avoiding PMI if I can’t come up with a 20% down payment?

There are plans which allow you to avoid PMI by getting an immediate 2nd mortgage when you purchase the home. For example, you would get a first mortgage for 80% of the purchase price (no PMI), a 2nd mortgage for 10% of the purchase price and put 10% down in cash (commonly known as an 80-10-10 mortgage). The benefit here is obvious (you avoid PMI) but there could be some potential downsides. Back to Questions

What factors should I consider when deciding on renting or buying a home?

If you are considering buying a house, one of the first decisions you need to make is whether buying a house instead of renting one is the right direction for you. Since owning a home is the "American Dream", many people simply assume that it's always to their advantage to buy a home, and for most, it is. Take a moment to review the following table to see how your situation fits in. Items in the blue are advantages and ones in red are disadvantages.

Back to Questions

What is the difference between APR and the interest rate?

APR - the Annual Percentage Rate will be outlined on your Truth In Lending disclosure - also known as the TIL that you receive after your application. The APR is often higher than the quoted interest rate, or note rate. The APR is different than your note rate, or the rate that you were quoted, because the APR includes, in addition to interest, some of the additional costs of obtaining your financing. This is a common practice in mortgage lending. Simply stated, if there were no costs in obtaining financing, your note rate and the APR would be the same. Back to Questions

What are points?

A point equals one percent of the loan. Points are usually paid at closing. If your loan amount is $100,000…then one point would equal $1,000…one percent. Discount Points are fees paid by the buyer to the lender to reduce the loan's interest rate. If you plan to keep the residence for five or more years, it may be worthwhile to pay discount points to reduce your monthly payment and achieve greater savings over the life of the mortgage. The number of discount points required to buy down your interest rate will vary based on loan type. Generally speaking, points are tax deductible when you are buying a primary residence, however we recommend you consult your tax advisor for information on limitations to tax deductibility. Back to Questions

Is a "no-cost loan" really no cost?

There is no free lunch, even in mortgages. Every real estate financing transaction has costs for processing the application, appraising the subject property, administering the transaction escrow, securing title insurance, etc. In a typical "no-cost loan" the lender agrees to pay all of the costs of the transaction for the borrower in exchange for the borrower paying a higher price for the loan. Depending on the individual borrower's circumstance, this may or may not be a "good deal."  Back to Questions

What does a "rate lock" mean?

Many borrowers do not want to be surprised at the close of the transaction with a rate which is higher than what was quoted at the beginning of the process. Hence, many borrowers ask that the lender commit or "lock" the initial rate quoted for a period of time sufficient to close the transaction. When a rate is "locked" the lender is being asked to guarantee the price of a commodity, the price of which changes daily. (Check out the daily changes in the bond market, which is a measure of the price of money on a daily basis.) The longer the lock period, the riskier the position of the lender, hence the higher the loan price (points) charged the borrower.

What is an escrow account?

The escrow account in a mortgage payment context is a special account that the lender holds on the behalf of the borrower in which is deposited monthly installments for property taxes, hazard insurance, and private mortgage insurance if required. The lender then pays these obligations on behalf of the borrower when they are due.

What happens when my loan is "sold"?

Often, the actual ownership of the loan remains the same, but the responsibility for the servicing or the bookkeeping on the loan changes hands. For example, Fannie Mae may be the institution which furnished the funds for the loan and continues to "own" it, but it may contract with different servicers over the life of the loan to collect the payments. Most home loans made today are subject to having different servicers over the life of the loan. Back to Questions

What is a conventional loan?

A conventional home loan is one which is not guaranteed by the Federal government. This is also true of FHA and VA loans. Back to Questions

What is a conforming loan? What is a non-conforming loan? FHA and VA?

A conforming loan conforms to the requirements of Fannie Mae and Freddie Mac. Usually, the specific reference is to loan amount. The maximum loan amount for 2003 as specified by Congress for single family loan purchased by either of these two agencies is $322,700. The term also refers to a loan which conforms to all of the other borrower and property requirements of these two agencies. A non-conforming loan is generally meant to be those loan amounts above $322,700. The term can also refer to those loan programs which allow for different borrower and property characteristics than usually required by Fannie Mae and Freddie Mac. Back to Questions

What is a B/C loan?

Similar to the bond market, those loans which most closely conform to "vanilla" credit and property standards are referred to as "A" paper loans and loans which do not have these characteristics are described as "B" or "C" paper loans. Also, similar to the bond market, interest rates on B and C paper loans are somewhat higher than for A paper loans in order to compensate the lender for higher perceived risk. Back to Questions

Who are Fannie Mae, Freddie Mac, and Ginnie Mae, and what do they have to do with home loans?

Fannie Mae is the more personalized name for The Federal National Mortgage Association (FNMA), Freddie Mac is a similar name for The Federal National Mortgage Loan Corporation (FHLMC), and Ginnie Mae refers to the Government National Mortgage Association (GNMA). Fannie and Freddie are quasi-governmental agencies which serve as a conduit between the capital markets of Wall Street and home lending across the United States. Ginnie Mae performs a similar function for government FHA and VA home loans. Back to Questions

What is a FICO score?

A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable. Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports. Credit scores analyze a borrower's credit history considering numerous factors such as:

1. Late payments

2. The amount of time credit has been established

3. The amount of credit used versus the amount of credit available

4. Length of time at present residence Employment history Negative credit information such as bankruptcies, charge-offs, collections, etc.

There are really three FICO scores computed by data provided by each of the three bureaus——Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score. Back to Questions

Why Can my loan be sold? And what happens if my lender goes out of business?

Your loan can be sold at any time. There is a secondary mortgage market in which lenders frequently buy and sell pools of mortgages. This secondary mortgage market results in lower rates for consumers. A lender buying your loan assumes all terms and conditions of the original loan. As a result, the only thing that changes when a loan is sold is to whom you mail your payment. If your loan has been sold, your existing lender will notify you that your loan has been sold, who your new lender is, and where you should send your payments from now on. If your lender goes out of business, you are still obligated to make payments! Typically, loans owned by a lender going out of business are sold to another lender. The lender purchasing your loan is obligated to honor the terms and conditions of the original loan. Therefore, if your lender goes out of business, it makes little difference with regards to your loan payments. In some cases, there may be a gap between the date of your lender's going out of business and the date that a new lender purchases your loan. In such a situation, continue making payments to your old lender until you are asked to make payments to your new lender. Back to Questions

I still don’t understand APR. How is it figured out & why is it different at different banks?

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.

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 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. Back to Questions

Why Do Mortgage Rates Change?

To understand why mortgage rates change we must first ask the more general question, "Why do interest rates change?" It is important to realize that there is not one interest rate, but many interest rates!

1. Prime rate: The rate offered to a bank's best customers.

2. Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).

3. Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.

4. Federal Funds Rate: Rates banks charge each other for overnight loans.

5. Federal Discount Rate: Rate New York Fed charges to member banks.

6. Libor: : London Interbank Offered Rates. Average London Eurodollar rates.

7. 6 month CD rate: The average rate that you get when you invest in a 6-month CD.

8. 11th District Cost of Funds: Rate determined by averaging a composite of other rates.

9. Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly.

10. Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.

Interest-rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.This leads to a fundamental concept:

Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).  Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).

A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.

Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up!

There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturity——typically $1000. If the price of the bond is currently at $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of interest over the next 5 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000. Back to Questions