Q: What does a lender look at to approve my loan application?
A: At the heart of approving a potential borrower is what Lenders call "the three C's of underwriting:"
- Credit - your credit history
- Collateral - the value of the property securing the loan (your house)
- Capacity - your financial ability to assume and repay debt Taken together, these create a portrait of a potential borrower's risk - that is, whether or not he or she will pay back his or her loan
Q: What are points, origination points, and discount points?
A: Points are one type of fee paid at closing by you to your mortgage lender. There are two types of points: Origination Points and Discount Points. Each point equals 1% of your loan amount. For example, 1 point on a $100,000 loan would cost $1,000. Origination points are charged to recover some costs of the loan origination process. Depending on the lender, the Origination Point(s) may be negotiable in whole or in part. Discount Points are used to "buy" your interest rate lower. This is known as a rate "buy down." A general rule of thumb is that one full Discount Point will lower your fixed interest rate .250% or your adjustable rate .375%. These points lower the interest rate for the entire term of the loan. There is usually some flexibility by the lender in determining the actual buy down formula, but less than with Origination Point(s). Points are tax deductible. The deduction is usually combined with your mortgage interest paid on line 10 of your Schedule A tax form. For additional information consult your tax accountant. Origination points are the gross profit for the lender, Discount points are commonly used to cover the cost of giving you a lower rate.
Q: What is a Loan Estimate (LE)?
A: It is an estimate of the fees that you will pay to close your loan.
Q: What is an impound/escrow account?
A: An impound account or an escrow account (the terms are interchangeable; each is used in different states) is the name of the account in which a lender collects payments you make toward your property taxes and hazard/fire insurance. If you have an impound/escrow account, each of your monthly payments will contain a fraction of your annual property tax and insurance costs. Your lender keeps these funds in the impound/escrow account and then pays your taxes and insurance directly when they become due. An impound/escrow account can be a convenient and trouble-free manner of ensuring that your insurance and tax payments are made on time.
Q: What are closing costs?
A: Miscellaneous costs associated with closing a real estate transaction. Items such as points, appraisals, credit reports, prepaid interest, homeowner's insurance, title insurance, and reserves the lender collects for future taxes and insurance. The down payment is not considered a closing cost. The typical fees that cover the loan processing and closing costs include:
- Lender Fees
- Appraisal fee
- Credit report
- Tax Related Service Fee
- Underwriting fee
- Processing fee
- Flood certification
- Bank/Investor fee Title charges
- Title insurance
- Recording tax
- Escrow fee
- Notary fee Prepaid expenses (not part of the actual cost of the loan, but included with payment)
- Prepaid interest (interest that accrues between closing and the end of the closing month - paid in advance)
- Homeowner's insurance
- Real estate taxes
Q: What are current interest rates?
A: Interest rates can change multiple times a day. Click here to see current rate trends and listen to an explanation of how interest rates work. (Link to rates page, new window)
Q: What is “Locking in a rate?”
A: You can secure your loan interest rate by completing a written agreement in which the HLC Team guarantees a specified interest rate for a specified period of time. Locking in a mortgage rate protects you against interest rate changes from the date of the rate lock until the date of the closing, as long as your rate lock has not expired. Should interest rates rise or fall during that period, the HLC Team is obligated to honor the committed rate at the time of the lock.
Q: How is the value of my home determined by an appraiser?
A: The appraiser’s role is to provide an estimate of value, as well as a complete, accurate description of the property by which the underwriter judges the property’s acceptability as security for the requested loan. The fair market value can be obtained in three ways; cost approach, sales comparison approach or income approach. The cost approach breaks down the property and gives a value to each piece; i.e., the lot of land, the dwelling, the garage or any other outbuildings. It also takes into consideration depreciation to determine the estimate of cost to rebuild the home just as it is. The sales comparison approach is the most common method of determining value in one to four family homes. The appraiser researches the local home sale market and determines a minimum of three homes that have sold in the designated neighborhood that are the most like the subject property. Each of the sold properties is compared to the subject property and adjustments are made from the comparable sales price to determine what the subject property would sell for in the current market. The income approach is not applicable unless the property is income producing - a non-owner occupied property or a property with two to four units in which one unit is occupied by the owner. This approach may be completed if the property earns income but is rarely used as the value indicator.