Your Guide to the Mortgage Process

No matter how well you may have prepared, buying a home can be a complex, confusing process. From loan approval to closing, people often find themselves blindly stumbling through the purchase of their homes. Don’t despair! By asking just a few questions, you can become a savvy consumer in today’s confusing mortgage market.

Why is my credit score important?
The lender considers many factors when determining whether or not to approve you for a loan. Perhaps the greatest factor is your credit score—which reflects your past payment history. Borrowers with lower credit scores present a greater risk for lenders, resulting in higher interest rates or loan denials. Put simply, paying your debts on time ensures that you will maintain a high credit score. Make late payments, and your chances for getting a competitive home loan drop significantly.

How are interest rates calculated?
Most lenders set their interest rates based on the “prime” rate set by the Federal Reserve. Beyond that, banks utilize your credit score and “points” to determine what you interest rate will be.

What are “points”?
A point is an upfront fee you pay the lender to reduce your monthly interest rate and total interest due over the life of the loan. One point is equal to 1% of the loan amount. “Buy

Can I get a reverse mortgage?
Reverse mortgages sound great, but aren’t an option for a homebuyer. Rather, reverse mortgages serve as a great way for older homeowners with substantial equity to “cash out” the equity in their homes by receiving monthly—or lump sum—payments from their banks. If you are looking to by a home, a reverse mortgage is not an option. Forward loans, however, offer a viable way for people to purchase homes.

Are there different types of forward loans?
With a forward loan, borrowers build equity and reduce debt by making monthly payments. However, sometimes even the most basic mortgage can prove too expensive for the average homeowner. In these cases, interest-only loans may provide a viable alternative.

What is an interest-only loan?
Interest-only loans offer people in expensive housing markets the ability to purchase a home that would normally be well outside of their price range. With an interest-only loan, borrowers make monthly payments towards the interest of the loan, and not the principal. Interest rates can change every month, or can be fixed for up to a 10-year period. Some interest-only loans are “negative amortization” loans, where your payment does not fully cover the interest, thereby increasing the loan balance over time.

What is amortization?
Put simply, amortization is the reduction of debt through regular payments towards interest and principal amounts over a definite period of time. However, keep in mind that your loan payment is not all that must be factored into your monthly home allowance. Other charges, such as PMI (Private Mortgage Insurance), homeowner’s insurance, and property taxes are all added onto your monthly loan payment.

Why do I need PMI?
PMI—or Private Mortgage Insurance—is necessary for anyone with less than 20% equity in his or her home. For example, if you borrow $90,000 towards the purchase of a $100,000 home, you only have 10% equity. The lender purchases insurance as protection should you default on the remaining portion of the loan. You, however, are responsible for paying the insurance premium until you own 20% equity in your home.

What about homeowner’s insurance?
Plan on having homeowner’s insurance throughout the life of your loan. Not only will homeowner’s insurance replace your home and valuables in the event of a fire, etc., it also protects the lender should your home be completely destroyed. As a result, all lenders require homeowners to have insurance.

How much will my property taxes be?
Property taxes can vary greatly from city to city. Be sure to ask your real estate agent what your property taxes will be, as they can add quite a large amount to your monthly house payment.

What are closing costs?
Closing costs are the fees that you, the borrower, must pay when you take physical possession of your new home. While closing costs can vary greatly across the nation, buyers can generally expect to pay around $2000 for home appraisal, home inspection, title insurance, and a wide variety of other fees incurred during the purchase of your home. Be sure to ask your real estate agent and loan officer for more information concerning your responsibilities at closing.

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