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PURCHASE A HOME - Mortgage FAQs
A mortgage FAQ will certainly come in handy, regardless of your circumstances. For buying a new home, you'll find your home loan process FAQ answered here. Additionally, you may be in another situation and still have an urgent FAQ. Refinance home mortgage questions and answers are also available to help guide you in this process.
Do I need a down payment?
This is one of the most common FAQs about mortgage. In today’s market a down payment is required. Buyers can qualify with as little as 3.5% down.
• Down payments in 5% increments up to 20% can improve your interest rate.
The interest rate on your first mortgage can improve by .125% to .500% by putting 5% to 20% down on your new home. Down Payments avoid or lessen the need for Private Mortgage Insurance (PMI).
What terms are available?
This is another important mortgage FAQ that most people need answered. The current fixed rate terms available for mortgage financing are 10, 15, 20, 25, 30 and 40 years. When choosing the terms of a mortgage it is important to keep in mind that payment is a function of term. The longer the term, the lower the payment will be, so you can scratch that one off of your list of FAQs about mortgage.
While a lower term loan comes with the benefit of a lower interest rate, remember that the payment will be higher in order to compensate for the shorter time frame to pay the loan back. Consider a longer term as you can always apply additional principle to your monthly payments to pay the loan off faster.
The current adjustable rate terms available are 3, 5, 7, and 10 years. These are 30 year loans with an initial fixed rate period. After the fixed period, the rate can periodically adjust but is capped. For more information on adjustable rate mortgages click here now.
The current interest-only terms available are a 30 year fixed, and 3,5,7, and 10-year ARMs.
What are acceptable sources of down payment?
For conforming conventional loans, borrowing more than 80% of the value of the home requires the borrower to make a five percent contribution from their own funds. Borrower's own funds are defined as:
• Funds on deposit in the borrower's checking, savings, money market, certificate of deposit or other depository accounts
• A loan secured with a personal asset
• Funds on deposit in an Individual Development Account
• A gift or grant from an agency that does not have to be repaid
• Funds on deposit in a Community Savings System that have been deposited by the borrower
• Life Insurance
• Trust Account
Funds held in a Foreign Account:
If the credit package contains monetary documents in a foreign language, the information must be fully documented and translated. The monetary exchange rate may be obtained from the Wall Street Journal. Please include a copy of the exchange rate table in the credit package.
Gifts:
A gift from a related person that does not have to be repaid is an acceptable source of funds on most programs. Proper verification of the gift must be in the form of a gift letter or a completed 1003 / 65 (Uniform Residential Loan Application), each of which must contain the following:
Gift Letter Requirements:
• State the donor's name and address, • State the relationship of the donor (Gifts must be from a family member, fiance, or domestic partner), • State that repayment is not required or expected, • Be signed by the donor, • Identify the address of the property being purchased, • State the amount of the gift.
In addition to the gift letter, evidence of the transfer and receipt of gift funds must be provided. A photocopy of the check from the donor (and in some cases, a cancelled check) with a copy of the deposit slip into borrower's account is sufficient. Evidence of the transfer is not required if the funds are already on deposit in the borrower's account.
Documentation supporting a gift or grant from an Agency must:
• Establish that the funds were provided by the employer, a municipality, nonprofit religious organization or nonprofit community organization, • Establish that the organization has a formal gift program, • Establish that the funds are a gift or grant that does not have to be repaid, • Provide evidence that the funds were received by the borrower or by the seller on the borrower's behalf, • Identify the donor's mailing address. • Gift funds are not allowed on investment property loans.
Examples of acceptable documentation are copies of grant program materials, award letters
or terms and conditions provided to the borrower.
When the LTV is greater than 80%, a gift is allowed only if the borrower has made a cash down payment of at least 5% of their own funds. This requirement will be waived if the gift is equal to or greater than 20% of the value (80% LTV) or if loan is submitted under the Alt 97 program. Jumbo loan programs require borrowers to have 5% of their own funds at all LTVs. Gifts are not an allowable source of funds for loans secured by non-owner occupied properties.
A related person is defined as:
• The borrower's spouse, child or dependent, • An individual related to the borrower by blood, marriage or adoption, • A guardian of the borrower, • A person for whom the borrower is a guardian, • The borrower's domestic partner, • Fiance.
Gifts of Equity:
Gifts of Equity are allowed from a related person for the purchase of a primary owner occupied residence. For an LTV of 80% or less, no borrower contribution is required. For an LTV which is greater than 80% the borrower is required to contribute 5% of his/her own funds to the transaction. A gift letter is required and the Gift of Equity must be reflected on the HUD-1 at close.
Gift or Grant from an Agency:
This type of gift does not require that the borrower make a 5% contribution from their own funds.
Documentation must:
• Establish that the funds were provided by the employer, a municipality, nonprofit religious organization or nonprofit community organization. • Establish that the organization has a formal gift program. • Establish that the funds were received by the borrower or by the seller on the borrower's behalf. • Identify the donor's mailing address. • Establish that the funds are a gift or grant that does not have to be repaid. • Gift funds are not allowed on investment property loans.
Life Insurance:
Cash value of life insurance can be used in the transaction.
Verification must:
• Be a computer generated or typed statement from the insurance company, • Identify the life insurance company, • Identify the policy owner, • Show the period covered and ending cash value, • Show any outstanding loans.
Other Borrowed Funds:
Any other borrowed funds for closing must be secured by one of the borrower's own assets. The borrower must disclose that the funds are borrowed on the first page of the application. Additionally, the file should contain documentation that verifies the terms of the loan and the monthly payment for the loan must be included in debt ratios.
Other Liquid Assets:
Assets such as stocks, bonds, employee thrift plans, etc., which are available to be liquidated for closing can be considered. The most recent statement will be required to document the account balance. The borrower must also provide documentation of the terms under which the funds can be liquidated or borrowed.
Proceeds from Sales of Home:
As a condition of closing, a certified true copy of the HUD-1, with the required net proceeds, will be required.
Property Trade-Ins:
The equity in the previously owned home is calculated by subtracting any existing liens and transfer costs from the lesser of the appraised value of the previously owned home or its trade-in price. Obtain an appraisal on the previously owned home and trade-in contract.
Relocation Benefits:
Relocation benefits may be used for closing provided the file is properly documented. A copy of the relocation agreement, a copy of the employers relocation policy, AND evidence that the borrower is eligible for this assistance will be required in the loan file. It would be helpful to note whether the borrower will receive the funds prior to or after closing.
Rent with Option to Buy:
If a borrower is currently renting the subject property, credit can be given toward the down payment from rents paid if the following documentation is provided:
1. Lease with Option to Purchase Agreement: document must be fully executed and have a minimum term of 12 months.
2. Verification of rents paid: borrower must provide 12 months cancelled checks to verify that the indicated amount of rent has been paid.
3. Appraisal analysis: a rental/purchase agreement must be in the loan file. The appraiser must determine the market rent by completing the Income Approach Section of the appraisal. The difference between the market rent and actual rent paid will be used as a credit toward the down payment. For example, if the tenant is paying $450 rent on a monthly basis and the market rent for that area is $400, a $50 credit can be used toward the down payment.
Sale of an Asset:
A bill of sale signed by all parties involved in the transaction will be required, as well as proof of ownership. Depending on the circumstances, sometimes third party proof of the value of the asset is required
Sweat Equity:
Sweat equity will be considered on a case-by-case basis. The file must be fully documented as to the labor performed and materials furnished by the borrower. In addition, the borrower must also document their own 5% prior to the use of sweat equity. Required documentation includes bids on work performed, receipts for all items purchased for the property, and the appraisal report must identify that all was completed in workmanlike manner.
Trust Account Funds:
Trust accounts may be used as borrower's own funds. Verification must be via a typed copy of the trust agreement or a signed statement on letterhead from the trustee that details the following:
• Identify the trustee, including name, address, telephone number and an individual contact. The trustee must be an independent party that handles trust accounts. (Trust company, financial institution, CPA, lawyer). • Identify the borrower as the beneficiary. • Show that the borrower has access to all or a specific amount of funds. • Show that the trust has the assets to disburse funds to the borrower.
401K / Retirement funds:
Retirement accounts must be input into the system at 70% of the most recent value and must document along with the terms under which the assets may be withdrawn. The underwriter does not need to verify liquidation of the asset.
1031 Exchange:
1031 Exchange is an acceptable source of funds for investment properties and second homes if documented properly. InterFirst will document the funds in the exchange with the following:
• An executed copy of the exchange document to verify that there are adequate funds to support the transaction.
• A copy of the HUD 1 from both transactions.
Unacceptable Sources of Funds:
• Cash-on-hand, • Signature loans, • Gifts from persons other than a relative (unless a relationship can be established), • Cash advances on unsecured lines of credit (credit cards), • Funds that cannot be properly verified
Do I qualify for down payment assistance?
Another popular mortgage FAQ, the answer is that some counties offer community programs that grant buyers down payment assistance. In most cases, the buyer must live in the home as their primary residence for a specific period of time in order to avoid repayment of the down payment funds. Ask a loan expert now if county assistance is available in the community where you plan to live.
What are my total out-of-pocket costs?
Capital First Home Loans, Inc. does not charge an application fee nor do you have to pay for an appraisal or credit report up front. However, there are a few things that you need to keep in mind that can affect what your total out-of-pocket expenses are before you consider this home loan process FAQ answered:
• Closing costs associated with the loan.
In most cases, closing costs associated with the loan are paid by the seller in the form of a seller contribution. The contribution can even cover prepaid items like taxes and homeowners insurance, and can be used to buy down interest rates and more.
• Homeowner's Insurance.
Although you can have your homeowner's insurance included in your monthly payment, the first 12 months would have to be paid in advance. In some cases it may be able to be paid through the closing but this could cause delays in the final approval process. Either way, before or at close, 12 months would have to be paid.
• Inspections, Home Warranties, etc.
Any inspections that you may want, but the seller is not willing to pay for, would have to be paid in advance. Also, many sellers offer a 1-year home warranty as an incentive to sell the house. If the seller is not willing to pay for a home warranty, you may purchase one on your own.
We hope we provided some insight to your FAQ refinance home mortgage questions. Please do not hesitate to contact us with your mortgage questions directly, or with any further mortgage FAQ you may have. |