Your credit history is a very important consideration in your ability to qualify for a loan, now more than ever. Recent changes in the mortgage industry and sub-prime market has put more emphasis on a person’s credit than in the previous few years. If you know that you have credit issues, now is the time to sit with one of our lenders and let us help you to determine how bad the credit problems are, and help you figure out how they can be repaired. This doesn’t mean that you will be automatically turned down for a loan, but if you are approved, having credit issues can affect the interest rate that you are charged, as well as the amount of any PMI.
PMI (Private Mortgage Insurance) is insurance that provides your lender a way to recoup its investment if you are unable to repay your loan. It is usually required when the loan amount is more than 80% of the lesser of the home’s value or the purchase price, depending on whether you are buying or refinancing. If you buy a home and you don’t have 20% as a down payment, you will probably have to pay PMI. Government loans such as the USDA Rural Development loan do not require PMI, but do require a guarantee fee. PMI insurance offers no protection for the homeowner.
Closing costs are the fees that are charged for the services involved in getting a loan. These expenses are charged to the borrower and cost between 3% and 6% of the amount being borrowed. Typical closing costs include loan application fees, credit report, title search and insurance fees, property appraisal, recording fees, title company fees, and prepaid interest, as well as escrow account deposits, pro-rated property taxes, and property insurance. Closing costs can vary depending on the type of loan program. Watch out for “junk fees” that are charged by some mortgage lenders, which can be quite expensive.
The borrower is responsible for most of the closing fees, but they can be negotiated into the purchase price or added to the purchase price, depending on the loan program.
Hazard insurance is the insurance that you as the homeowner will have to protect your interest in the property. It protects you against damages to the property caused by fire, storm, or other unforeseen occurrences. Typically proof of one year of insurance will be required before you can close on a loan. You are allowed to pick the insurance company yourself, and simply need to make sure that the lender has ongoing proof that you have current, acceptable hazard insurance.
A title search and report will review any impediment that would prevent you from purchasing a home with a clear title. It will show liens, restrictions, and interests of others that own the property, easements, and anything that might limit the use of the property. A policy is issued by a title insurance company and will insure the homeowner against errors in the title search or report. The cost is dependent on the cost of the property and the work involved with clearing up the title. Typically the search is paid for by the seller and the actual policy is paid for by the buyer. An owner’s policy is only needed when you purchase the property, however; a lender will typically require a new search and insurance policy to protect them each time the property is used for collateral.
APR (Annual Percentage Rate) is the total cost to borrow money from the lender over the life of the loan, including the interest rate charged to borrow the money, closing costs and lender points. By comparing the APR to the actual interest rate, you will be able to see a true picture of what the loan is costing you. If the APR is much higher than the rate, extra closing fees or points have been charged.
The rescission period is the waiting period of 3 business days between signing loan papers and the final closing of the loan. It is required by federal law on almost all financing of property that is owner occupied at the time the loan papers are signed. It is not required if you are purchasing your primary residence and also using it for collateral on the loan (a typical purchase).
An escrow account is a trust account established by a lender to hold money for real estate taxes, PMI payments, and hazard insurance premiums as they are received each month. The money is sent to the lender each month in addition to your regular principal and interest payment. When the bill is due, the escrow account disburses the money. If you borrower more than 80% of the home’s value you will be required to escrow with most lenders. Choosing not to escrow can also affect your interest rate.