Loan FAQs | New Homes Market Center
Purchasing a home is one of the greatest investments you will ever make. Take the time to understand everything you can about home loans.
Here are some frequently asked home loan questions:
- What is the difference between pre-qualification and pre-approval?
- Do I have to get pre-qualified before I look for a new home?
- Is there anything I shouldn’t do during the home loan process?
- What key questions should I ask my mortgage lender as I shop for a home loan?
- Should I lock in an interest rate?
- How are interest rates determined in the market?
- What is the breakdown of a mortgage payment?
- What happens after I complete a formal application for my lender?
- How can I raise more money for my down payment?
- Once I have been pre-qualified for a home loan, what are the next steps?
- I hear the terms ‘closing’ and ‘funding’ often, what exactly do they mean?
What is the difference between pre-qualification and pre-approval?
Pre-qualification is a term used by lenders that indicates you have completed an application form and that you will most likely be approved for a home loan. Notice that it does not indicate that you are approved only that you will most likely be approved. A pre-approval indicates that you are approved because your application and corresponding documentation was reviewed and approved by an underwriter. The final approval, however, comes when all the paperwork required such as title, appraisal, and insurance is received and verified by the underwriter. Please note this important fact: if your financial situation should change before the closing date (for instance you purchase a vehicle, furniture, or appliances) it could change your approval status to a denial. Speak with your lender about any purchases you are thinking about making during your approval process.
Do I have to get pre-qualified before I look for a new home?
No, however, the importance of getting pre-qualified before you start looking for a home cannot be overemphasized. It will help you get the best terms available; expose any issues you may have with your credit and will give you an idea of the price range you should stay within.
There may be fraudulent activity, an unpaid medical bill or other issues on your credit report that you are not aware of and will need attention before you can qualify for certain loan programs. Having a credit issue can prevent you from receiving the best possible loan terms or interest rate and may take time to resolve.
Keep in mind that the pre-qualification will determine the maximum you can afford, but it would be wise to search for homes in a slightly lower price range than the maximum. You do not want to overextend yourself financially without leaving room for possible unexpected future expenses.
Is there anything I shouldn’t do during the home loan process?
Yes, there are five activities you should not do when attempting to buy a new home:
Do not change jobs
Changing jobs during the home loan process can create a real problem in qualifying you for a loan – especially if that job is in a different line of work or at a lower income. It can also create delays as the new job will need to be verified.
Do not switch banks or move your money around
It is best to leave your money right where it is until your loan is closed. Moving your money to a new bank or even into a new account can wreak havoc with the verification process.
Do not pay off bills
Your loan officer will advise you if it is necessary to pay off bills to help you qualify for a new loan. He or she will also instruct you in the best way to pay off bills to ensure receipt of evidence needed to prove the bills have been paid.
Do not make major purchases or try to obtain another loan
Many borrowers make the mistake of buying a new car, some furniture or making another major purchase without realizing the impact it can have on their ability to buy a home. A large monthly payment can affect the amount of home you qualify for and the loan process itself may not be as smooth and successful as it should be.
Do not make large deposits that cannot be verified
Making large deposits of money that are not part of your current income into your bank accounts can send red flags to lenders. For example, if you receive a large gift of cash from a friend or family member, the source of the money may need to be verified and proof of that source will probably be required. Talk to you lender to see what option is best, but try to keep large deposits seasoned in your bank account for six months or more before buying a house.
What key questions should I ask my mortgage lender as I shop for a loan?
- What are the total points, origination, and closings costs for the interest rate you’ve quoted?
- Can I lock-in the interest rate and points you’re quoting me over the telephone today?
- How many days are the interest rate and points locked-in?
- Do you have a written agreement that locks in my interest rate and points?
- What are the exact charges that will show up on my settlement statement at closing, and will you please send me a Good Faith Estimate?
- How many days will it take to obtain a formal loan approval?
Should I lock in an interest rate?
Yes, consider locking in your interest rate when you have an accepted contract on a house and have an idea of the closing date. Know your timeline and then think about the lock possibilities. A lender can lock for 15 days to more than nine months, but you will want to discuss the benefits and risks of locking a loan for more than 90 days. The longer the lock, the higher the interest rate; however, if interest rates are rising a long-term lock may be a good decision.
How are interest rates determined in the market?
Interest rates on mortgages closely follow the bond market, more specifically, the FNMA mortgage backed securities. It is hard to track these securities, so you can also watch the 10-year Treasury bond, which usually correlates with the FNMA bonds. Bonds move in increments of 32nds and they move every day. As the price, or change, on these bonds go down, the yield and interest rates go up. Bonds prices down; rates up. For example, if the 10-year bond is down 16/32, discount points on a given interest rate will go up one-half a point (fractionally speaking, 16/32 = 1/2). As the change on these bonds goes up, the yield and interest rates come down. Bonds prices up; rates down. For example, if the 10-year bonds are up 8/32, discount points are likely to fall one-quarter of a point.
What is the breakdown of a mortgage payment?
- Mortgage payments consist of PITI:
- Principal – the portion used to pay off the balance of the loan
- Interest – the portion that the lender collects for the loan
- Taxes – the property taxes for the area of the house you are purchasing (check the tax rate for the area you’re considering)
- Insurance – also called homeowners or hazard insurance – this is the insurance you have on your house to protect against storms, fire, theft and other instances included in your specific policy.
In some cases, you may also pay for mortgage insurance, which is required when the first lien amount exceeds 80 percent of the total value of the home. However, there are ways of structuring loans so you can put nothing down and not have to pay mortgage insurance. You may also pay for a second lien, which is in second place to the first lien and is usually a higher interest rate and can be used in place of paying mortgage insurance. Last, if the home is located in a flood zone, you will be required to pay flood insurance.
In Texas, the term used by the lender when they collect your taxes and insurance with your monthly house payment is “collecting escrows.” On some loan programs, you can choose to waive this option and pay them on your own.
What happens after I complete a formal application for my lender?
After you complete the formal application, often referred to as the 1003, you should receive a good faith estimate (GFE) and a truth in lending (TIL) disclosure from your lender within 72 hours. The GFE is an estimate of the closing costs, interest rate and loan amount that will be part of the fees to purchase your house. The TIL disclosure informs you of the actual cost of lending and the annual percentage rate (APR). On the TIL, make sure there is an APR and that there is no pre-payment penalty on the home loan – the box that says there is no pre-payment penalty on the loan should be checked.
How can I raise more money for my down payment?
Here are eight ideas to raise money for a down payment. It is important to work with your lender if you have any questions.
1. Have a relative give you the money as a gift.
Documentation will be required to prove that the money is actually a gift and not a loan. The IRS permits any taxpayer to give up to $11,000.00 per year to another person without having to pay a gift tax. Technically, your mother could give you up to $11,000.00 and give the same amount to your spouse. Your father could do the same. This would give you close to $44,000.00 towards a down payment and closing costs. (NOTE: Unless you are putting down at least 20 percent or are obtaining a government-insured loan, 5 percent of the sales price must be your own money. Some loan programs might not allow gifts contributions, please check with your lender.)
2. Borrow against your 401K or insurance policy.
If you decide to cash out all or a portion of your 401K, you will be subject to withdrawal penalties and payment of taxes since it will be counted as a debt.
3. Sell or borrow against an asset.
Selling an asset such as a car can help increase the amount of money you have available. Borrowing against an asset is also acceptable as long as you qualify with the additional debt.
4. Obtain a low-point or no-point home loan.
This will reduce the amount of your closing costs substantially. In some instances, the lender can also pay all or part of your non-recurring closing costs.
5. Ask the seller to pay all or part of your non-recurring closing costs. Your real estate agent can assist you with this when you make an offer on a home.
6. Ask the seller to carry back financing.
If the seller does not need all of the equity in their property at closing, they may be willing to carry some of the financing, which will reduce the amount of your down payment.
7. Consider different home loan programs.
Your lender can help you determine the best loan program to suit your needs. There are a wide variety of programs that require lower down payments and assist with closing costs. There are also city and county down payments assistance programs you can check into.
8. Receive assistance from non-profit organizations
There are many non-profit organizations available to help most individuals.
Once I have been pre-qualified for a home loan, what are the next steps?
The next steps in the new home buying process are as follows:
- Call New Homes Market Center
- Schedule a meeting with one of our Realtors® since they are familiar with structuring contracts to protect your financial goals
- Locate your new home
- Make an offer
- Accept the contract
- Choose your new home options
- Attend inspections
- Close on your loan
- Move in!
I hear the terms “closing” and “funding” often, what exactly do they mean?
Closing means you have actually signed the deed of trust. Funding means the money has been wired from the lender and received by the title company to pay the seller. After funding occurs, the house is yours!