| Real Estate 101 - Loan Application |
|
|
|
|||||||||||||||
| What is PITI? | |
|
PITI is an abbreviation of the major components of a mortgage payment, namely, Principal, Interest, Taxes, & Insurance. The "Principal" is the portion of the monthly payment that goes to reduce the outstanding mortgage balance. The "Interest" is the fee charged by the lender for borrowing a sum of money for a specified amount of time. The "Taxes" are the property taxes on the property and the "Insurance" is usually the mortgage & hazard insurance. The lender usually uses an estimated PITI payment for pre-qualifying borrowers. | |
| Why does the lender collect Taxes and Insurance each month? | |
|
On many loans, the lender collects 1/12 of property taxes and 1/12 of hazard insurance as part of the monthly payment. The lender keeps the taxes and insurance portion into an escrow account to pay the taxes and insurance when they become due. This is done by the lender to make sure that the taxes and insurance are paid on time. | |
| What is Underwriting? | |
|
Underwriting is the process used by lenders to evaluate factors such as borrower’s creditworthiness and income, as well as the quality and value of the property, in order to make the lending decision. | |
| What is Loan-to-Value Ratio (LTV)? | |
|
Loan-to-Value Ratio is a percentage of the loan as it compares to the value of the property. For example, 80% LTV means the buyer is borrowing 80% of the value of the property and putting 20% down payment. | |
| What are Qualifying Ratios? | |
|
Qualifying ratios are the calculations and guidelines used by lenders to determine how much loan the borrower can qualify for. Two kinds of qualifying ratios that are commonly used are Front Ratio and Back Ratio. | |
| How is Front Ratio calculated? | |
|
Front ratio is calculated by dividing expected monthly housing expenses by gross monthly income. Monthly housing expenses are the monthly PITI payment (Principal, Interest, Taxes, & Insurance) plus any other home-related expense like monthly homeowners' association dues. An acceptable front ratio defers from one lender to another. | |
| How is Back Ratio calculated? | |
|
Back ratio is calculated by dividing total monthly debt obligations (including expected housing expenses) by gross monthly income. Total monthly debt obligations include lease or loan payment on car(s), minimum payment on credit card(s), payment on student loan(s), expected housing expenses (Principal, Interest, Taxes, Insurance plus homeowners' association dues, if any). An acceptable back ratio defers from one lender to another, and sometimes from one loan program to another. | |
| What are Compensating factors? | |
|
Compensating factors are those positive factors in a borrower's personal finances that the lender may use for offsetting any negative factors while making lending decision. These factors are highly subjective in nature. An example of a compensating factor could be a recent promotion of the borrower may be used to compensate for a couple of late payments on credit cards last year. | |
| What is Credit History? | |
|
Credit history is a chronological record of a person's open and repaid debts. | |
| What is a Credit Report? | |
|
A credit report is a report, prepared by a credit bureau, containing a person's credit history. When borrower applies for loan, the lender requests a credit report in order to understand borrower's credit history and determine borrower's creditworthiness. Credit history plays a significant role in the lending decision. | |
| What is a Merged Credit Report? | |
|
A merged credit report is a comprehensive credit report that combines credit history information from three major credit repositories, namely Equifax, Experian and TransUnion Corp. | |
| What is a Verification of Deposit? | |
|
A verification of deposit is a document from borrower’s bank, confirming that the money required to close the purchase (down payment + closing costs) is available in the borrower’s bank account(s). After filling out a loan application, usually the lender asks borrower’s bank to provide VOD. | |
| What is a Verification of Employment? | |
|
A verification of employment is a document from borrower’s employer that confirms that the borrower is currently employed with the employer, borrower's position, and salary. | |
| Who is a Co-signer? | |
|
A co-signer is a party, other than the primary borrower, who signs the promissory note and thus shares responsibility for the loan borrowed. | |
| What is Origination Fee or points? | |
|
Loan origination fee or Points is the service fee charged by the lender on a loan. One point equals to 1% of the loan amount. It is usually paid at the closing of the transaction. It is usually not tax deductible. (Please confirm with your tax consultant). | |
| What are Discount Points? | |
|
Discount points are additional closing costs paid to a lender in order to reduce the interest rate on a loan. One discount point is 1% of the loan amount. | |
| What is Warehouse Fee? | |
|
Warehousing fee is a fee that may be charged by a lender to a borrower for the time period when the purchase money is "waiting" for a loan to close. | |
| What is an Impound account? | |
|
An impound account is an account set up by a lender for payment of property taxes, hazard insurance and other recurring expenses such as mortgage insurance and flood insurance. An impound account is also known as an escrow account (different from escrow). | |
| What are the typical contents of an impound account? | |
|
Typically, an impound account has following prepaid recurring costs: Hazard insurance premium for 2 months, mortgage insurance premium for 2 months (if applicable), flood insurance premium for 2 months (if applicable) and property taxes for 6 months. | |
| Do all loans require that an impound account be set? | |
|
Not necessarily! Usually loans with low loan-to-value ratio (higher down payment) do not have an impound account requirement. Also, in some cases the requirement of having an impound account is waived in return for additional closing costs charged up-front. | |
| What is an Interest? | |
|
An interest is the fee charged by the lender for borrowing a sum of money for a specified amount of time. | |
| What is an Interest Rate? | |
|
An interest rate is the percentage of the sum of money borrowed that is paid as the fee for borrowing the money for a specified amount of time. | |
| What is an Index? | |
|
An index is a published benchmark interest rate that the lenders use to compute interest rate of an adjustable rate mortgage. The are three commonly used indexes, Eleventh District Cost of Funds Index, Index based on Treasury Bills and Index based on Certificate of Deposit. Usually the Margin is added onto Index to compute the adjustable interest rate. | |
| What is Margin? | |
|
The number of percentage points the lender adds to the index rate to calculate the adjustable rate mortgage (ARM) interest rate at each adjustment date, subject to the limit for change in the interest rate. Unlike the Index of a loan, the margin does not fluctuate. The interest rate fluctuations in an adjustable rate mortgage is caused by the fluctuations in the index rate. | |
| What is Lock-in Rate? | |
|
Lock-in rate or rate lock is a written guarantee given by a lender for a specific interest rate for a specified period of time. Most of the times, along with the interest rate, the points to be paid are also locked-in. | |
| When can an interest rate be locked in? | |
|
Usually, after the borrower has submitted the detailed loan application and any other supporting documents requested by the lender, the borrower can request to lock in the interest rate. The procedures on how and when the rate can be locked, varies from lender to lender. Use your judgement and information given by your lender to lock-in a low interest rate. | |
| What is Lock Period? | |
|
A lock period is the amount of time for which the interest rate is locked-in or guaranteed by the lender. Usually the locked-in interest rate is guaranteed for 30, 45 or 60 days from the date it was locked-in. Within this period the purchase transaction on the property needs to be closed (close of escrow). If one is unable to close the transaction within the lock period, the lender is usually ready to extend the lock period if the borrower is willing to pay additional point(s). | |
| What is Loan term? | |
|
Loan Term is the time period a borrower has for re-paying the mortgage. Most commonly used loan term is 30-year or 15-year. | |
| What is an Acceleration Clause? | |
|
An acceleration clause is a provision in a loan agreement that permits the lender to demand the outstanding principal balance if certain conditions occur. Due-on-sale clause is a type of acceleration clause. | |
| What is Due-on-sale Clause? | |
|
Due-on-sale clause is a type of acceleration clause in the loan contract that gives the right to a lender to demand that the loan balance is to be paid in full upon sale of the property. | |
| What does Pre-qualification mean? | |
|
Pre-qualification means, based on the information on buyer's income and debt, a lender determines how much is the buyer eligible to borrow. Pre-qualification happens prior to filling out detail loan application. Some lenders check the credit history before they issue a pre-qualification letter. | |
| What is the purpose of pre-qualification? | |
|
The main purpose of pre-qualification is for the buyer and buyer's agent to get a ballpark price range to work with. This way, the buyer and buyer's agent can focus on the right target price range to begin with and use time & efforts more efficiently while searching for a home. When it comes to credibility with the seller and listing agent, a pre-approval letter is considered stronger than pre-qualification letter. | |
| What does Pre-approval mean? | |
|
A pre-approval means that the lender has committed to lending money at specified terms to a borrower before the real estate property is purchased. Usually, the lender issues a pre-approval letter that details the terms of pre-approval. Most of the lenders do not Lock-in the interest rate until the property is purchased. | |
| What are the advantages of getting a Pre-approval Letter? | |
|
In order to get a pre-approval letter, the borrower needs to fill out the loan application and provide necessary supporting documents to the lender. In addition to getting lender's commitment in writing, a pre-approval letter is also a proof of buyer's financial capability as it relates to buying a home. A pre-approved buyer making a purchase offer is perceived to be financially stronger than a buyer who is only pre-qualified. | |
| Copyright © 2008 TrSoft - planetRE. All Rights Reserved. planetRE is a trademark of TrSoft. |