General Questions

Q: What is a conforming loan?

A: A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac.

Q: What is a good faith estimate and how does it help me?

A: It’s an estimate that lists all fees paid before closing, all closing costs, and any escrow costs you will encounter when purchasing a home. Custom Financial Mortgage will supply it within three days of your application so that you can make accurate judgments when shopping for a loan.

Q: What is a rate lock?

A: A rate lock is a contractual agreement between the lender and buyer. There are four components to a rate lock: loan program, interest rate, points, and the length of the lock.

Q: What is a jumbo mortgage?

A: A mortgage larger than the maximum eligible for conforming purchase by the two Federal agencies, Fannie Mae and Freddie Mac.

Q: What are points?

A: It is an upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., “2 points” means a charge equal to 2% of the loan balance.

Q: What is loan-to-value (LTV)?

A: This is a ratio of the amount of money you wish to borrow compared to the sales price or value of the home you want to purchase. A 75% LTV on a $100,000 home would equal a $75,000 loan. The property value is determined by the appraised value or purchase price, whichever is less.

Q: What is included in a monthly mortgage payment?

A: The monthly mortgage payment mainly pays off principal and interest. Local real estate taxes, homeowner’s insurance and mortgage insurance (if applicable) are typically included as well.

Q: How much will I pay in property taxes?

A: Generally, you can expect to pay 1-3% of the market value of the home in annual property taxes. For example, if your home has a market value of $100,000, it’s likely that you might pay between $1,000 and $3,000 per year in property taxes, depending on where you live. Ask your Custom Financial Mortgage Loan Officer about property taxes in the area you’d like to buy a home.

Q: How does the interest rate factor in securing a mortgage loan?

A: A lower interest rate allows you to borrow more money than a high rate with the same monthly payment. Interest rates can fluctuate as you shop for a loan so be sure to ask us about a rate “lock-in” which guarantees a specific interest rate for a certain period of time. Our lenders will disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance and other fees included in the loan.

Q: What is an escrow account?

A: An escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner’s insurance, mortgage insurance (if applicable) and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments.

Q: What is RESPA?

A: RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose information to potential customers throughout the mortgage process. By doing so, it protects borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing and escrow account practices, and business relationships between closing service providers and other parties to the transaction.

Q: What is an origination fee?

A: The fee, calculated as a percentage of your total loan amount, is often referred to as “points.”

Q: What are points?

A: Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/4 (or.25) of a percentage point. As you’re shopping for loans, ask us for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible and you may be able to negotiate for the seller to pay for some of them.

Q: What is PMI?

A: PMI stands for Private Mortgage Insurance. This insurance is required if you make less than a 20% down payment or have less than 20% equity in your home. It is additional insurance designed to protect lenders from individuals who default on their loans. If you have less than 20% to put down, there are still options for avoiding PMI. Please inquire with your Custom Financial Mortgage Loan Officer.

Q: What are closing costs?

A: Closing costs (or settlement costs) are the miscellaneous expenses involved in the transfer of real estate from one owner to another. They are paid when the homebuyer and the seller meet to exchange the necessary papers for the house to be legally transferred.

Q: What does a title company do?

A: A title company acts as a neutral third party to handle the legal documents and funds on behalf of a seller and a buyer, or a lender and a borrower.

Q: What is an insurance binder? Do I need one for the closing?

A: A homeowner’s insurance policy for the property must be in force at the time of the closing. An insurance binder is a homeowner insurance company’s written commitment to insure title to the property, subject to the conditions and exclusions shown on the binder. Prior to closing, you will need to obtain a Homeowner’s Insurance Policy. Your mortgage loan commitment letter will detail exactly how the binder should be worded and what coverage is required. You should try to take care of this as early as possible to ensure a smooth transaction. Please bring the binder and paid receipt to closing evidencing one year of Homeowner’s Insurance coverage.

Q: What can I expect to happen on closing day?

A: You’ll present your paid homeowner’s insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc.) and then the money the seller owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proof of any inspection, warranties, etc.

Once you’re sure you understand all the documentation, you’ll sign the mortgage, agreeing that if you don’t make payments the lender is entitled to sell your property and apply the sale price against the amount you owe plus expenses. You’ll also sign a mortgage note, promising to repay the loan. The seller will give you the title to the house in the form of a signed deed.

You’ll pay the closing agent all closing costs and, in turn, the closing agent will provide you with a settlement statement of all the items for which you have paid. The deed and mortgage will then be recorded in the state Registry of Deeds, and you will be a homeowner.

Q: How can I get a copy of my appraisal or credit report?

A: Please feel free to  contact our Office to obtain copies. We’d be happy to help!

Purchase Questions

Q: What is a Pre-qualification?

A: This is the process of determining whether a customer has enough cash and sufficient income to meet the qualification requirements set by the lender on a requested loan.  A pre-qualification is subject to verification of the information provided by the applicant.  Keep in mind, a pre-qualification is not an approval because it does not take account your credit history.

Q: What is the difference between pre-approval and pre-qualification?

A: The pre-approval process is much more complete than pre-qualification. For pre-qualification, the loan officer asks you a few questions and provides you with a pre-qual letter.  Pre-approval includes all the steps of a full approval, except for the appraisal and title search.  Pre-approval can put you in a better negotiating position, much like a cash buyer.

Q: How does a lender use my credit report?

A: Your credit report is used to evaluate your mortgage request by showing  how you have handled your credit obligations in the past.  The following companies can provide you with a copy of your credit report, often free of charge.

Q: Can I buy a home if I have less-than-perfect credit?

A: Yes. Keep in mind that lenders don’t just look at your past history, but also at your ability and willingness to pay in the future. At Custom Financial Mortgage, we may be able to help you buy a home, even if your credit isn’t perfect.

Q: Which is better: a fixed or adjustable interest rate?

A: If you plan to be in your home for more than seven years, you may want to consider a fixed rate mortgage, which offers predictable payments and long-term protection against rising mortgage interest rates. If you plan to be in your home for seven years or less, an adjustable rate mortgage could be attractive. Keep in mind that with an adjustable rate mortgage, your monthly payments have the potential to go up each time your interest rate adjusts.

Q: When should you pay discount points?

A: When you pay a discount point, you are essentially paying part of your interest to the lender up front. This will lower your interest rate, as well as your monthly payment, over the life of the loan. One discount point is typically equal to 1% of the loan amount. For example, one point on a $100,000 loan would require payment of $1,000 at closing. Generally speaking, the longer you plan to remain in a property or hold your mortgage, the more advantageous it is to pay points. There is no requirement to pay discount points; whether or not you decide to pay points is completely up to you.

Q: What documents will I need to apply for a mortgage?

A: Traditional loans usually require documents that verify your employment, income and assets, and may include:

  • Your Social Security number
  • Pay stubs for the last two months
  • W-2 forms for the past two years
  • Bank statements for the past two months
  • One to two years of federal tax returns
  • A signed contract of sale (if you’ve already chosen your new home)
  • Information on current debt, including car loans, student loans and credit cards

Q: Which mortgage and homeowners costs are tax-deductible?

A: Three types of mortgage and homeowners costs may be tax-deductible: discount points, interest paid on a home loan or home equity loan and property taxes. After the year of sale, your mortgage interest and annual property taxes are the only deductible costs. For a refinanced loan, points must be deducted over time. Consult your tax advisor for advice about your situation.

Q: What is earnest money? How much should I set aside?

A: Earnest money is money put down, through your Realtor, to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary with local customs and conditions).

Q: Are there special mortgages for first-time home buyers?

A: Yes. Custom Financial Mortgage has access to several affordable mortgage options that can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. We are now able to help borrowers who don’t have a lot of money saved for the down payment and closing costs, have a lower credit score, have quite a bit of long-term debt, or have experienced income irregularities.

Q: How large of a down payment do I need?

A: There are mortgage options now available that require little to no money for a down payment. But the larger the down payment, the less you have to borrow, and the more equity you’ll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you’ll also need money for closing costs, moving expenses and possibly repairs and decorating.

Refinance Questions

Q: What are the benefits of refinancing?

A: You may want to consider refinancing if you are interested in paying off high-interest-rate debt, shortening the length of your repayment term for your mortgage or lowering your monthly mortgage payment.

Q: Can I refinance to take cash out of my house?

A: Yes. There are a variety of options that allow you to tap into your home’s equity and take cash out. Consult your loan originator as to what is the best options for you.

Q: How can I consolidate debt when refinancing my mortgage?

A: Cash-out refinancing can help homeowners who want to consolidate high-interest, nondeductible debt. Because your mortgage interest rate is likely to be lower than rates on credit cards or other types of bank loans, consolidating debt may reduce your overall monthly debt payments. In addition, your mortgage interest may be tax-deductible, while your credit card interest is not.

Q: Do I need to have my house appraised in order to refinance?

A: Yes, in most cases. However, depending on the circumstances, an appraisal may not be required, such as the Harp 2.0 program and FHA Streamline refinances.

Q: When does it make sense to refinance?

A: Usually people refinance to save money, either by obtaining a lower interest rate or by reducing the term of the loan. Refinancing is also a way to convert an adjustable loan to a fixed loan or to consolidate debts. The decision to refinance can be difficult, since there are several reasons to refinance. However, if you are looking to save money, try this calculation:

  1. Calculate the total cost of the refinance
  2. Calculate the monthly savings

Now, divide the total cost of the refinance (#1) by the monthly savings (#2) and this is the “break even” time.  If you own the house longer than this, you will save money by refinancing.  Since refinancing is a complex topic, consult a mortgage professional.

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