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2.) What is the difference between being pre-qualified and pre-approved?
Pre-qualifying is the process through which a loan officer determines the dollar amount that a buyer can qualify for based on their income, debts, and down payment. Pre-approval is when your loan application and income and asset documents are underwritten and approved by a specific bank or lender. Receiving an actual pre-approval is recommended before making an offer on a home for two reasons. The first is that a seller will feel more confidant receiving an offer from someone who has been pre-approved than from someone who hasn't. The second reason for pre-approval is that it reduces the amount of stress involved in the real estate purchase process. There's nothing worse than finding your dream home and worrying about being approved for the loan.

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3.) What is the difference between a fixed-rate and an adjustable-rate mortgage?
A fixed rate mortgage is an interest rate which remains the same for the life of the loan (usually 15 to 30 years), resulting in a monthly payment which remains constant. An adjustable rate mortgage, on the other hand, is a mortgage rate which is recalculated every 1, 6, or 12 months, depending on the terms of the note. This means that your interest rate and monthly payments will fluctuate based on the current index that the rate is tied to such as the 12 month Treasury Index.

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4.) Do I have to prove my income?
No. There are several different loan programs which allow you to buy a home without proving your income. Some programs require only 5% down for those with strong credit scores. Most non-income verifying (NIV) loans require 20% down payment due to the fact that the bank is taking on a higher degree of risk by not knowing how much you earn. All NIV loans have higher interest rates due to the risk involved, but some can be secured with only a marginal rate increase.

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5.) What is LTV (Loan-to-Value)?
Loan to value, or LTV as it is commonly referred to, is the ratio of Loan Amount to the purchase price or value of the property. For example, a loan of $100,000 on a property selling for $200,000 is at an LTV of 50%. The loan to value ratio is determined by the amount of down payment.

Purchase loans
When a property is purchased, the down payment is critical to the lending decision. When the down payment is less than 20%, a conventional loan will require mortgage insurance. These premiums are calculated based on the amount of down payment and are automatically included in your monthly payment.

Refinance loans
In a refinance transaction, the LTV is calculated on the actual appraised value. If a borrower wants to get cash out of the value of the home, most lenders will require the total loan amount be no more than 80% of the appraised value of the home. If the purpose of refinancing is simply to lower the current interest rate by financing the current loan amount plus applicable closing costs, you can borrow up to 80% of the value without requiring Mortgage Insurance. When paying off both a first and second mortgage in a refinance transaction, most lenders will require that the second loan be at least 12 months old. If the second is not "seasoned" for 12 months, the lender will view the consolidation of the first and second mortgages as a cash out refinance loan, subject to the lower LTV guidelines.

In general, the lower the loan to value ratio, the more favorably a lender views the risk of the loan. Loan to value considerations will differ in owner occupant versus rental or non-owner situations

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6.) What is Title Insurance?
Title Insurance is an insurance policy, issued by a Title Insurance Company, which insures a home owner against claims made due to errors or omissions that were not disclosed up front. The premiums are determined primarily by the loan amount and are regulated by local agencies. This policy protects you from buying a home and later having a lien placed on your home for a debt incurred by the previous owner. All mortgage lenders will require that you have a title insurance policy.

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7.) What is private mortgage insurance (PMI)?
Private mortgage insurance is a policy which protects the lender from loss due to payment default by the borrower. It is used in conventional loans and is typically an additional monthly charge included in your mortgage payment. PMI is required when the loan amount exceeds 80% of the purchase price of the home. PMI allows buyers to obtain loans with less than 20% down payment due to the fact that the lender is protected in case of default by the borrower.

This type of insurance should not be confused with mortgage life, credit life, or disability insurance which is designed to pay off a mortgage in the event of the borrower's disability or death. Once you have 20% equity in your home you can request that this insurance be dropped. Most lenders will require an appraisal to verify your equity position and will require that your last 12 mortgage payments have been made on time.

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8.) What are "points" and when should I pay them?
Points are also called origination fees or discount points. These fees are charged by the lender to decrease your mortgage interest rate. One point is equal to one percent (1%) of the amount of the loan. As a general rule of thumb, these fees should only be incurred if you plan to be in the home longer than 5 years. To calculate the actual break-even timeframe for your loan, divide your monthly savings from the proposed lower rate into the cost of the points. For example, if by paying $1,000 in additional points, you will save $20 per month, then your break-even point is 50 months. This means that you need to keep the loan for 50 months just to break even on the fees. Only after the first 50 months do you begin to save money on interest.

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9.) What is an appraisal and how is it calculated?
An appraisal is a determination of property value made by an independent, professional appraiser based on the recent sales prices of comparable homes in the area. Appraisers are required to insure that the home is worth what you're paying for it thereby protecting the lender should they have to repossess and resell the home. Appraisals also protect you from paying more than a home is worth.

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10.) What is a FHA mortgage?
Federal Housing Administration (FHA) programs are loans insured by the FHA which allow a buyer to buy a home with only a 3% down payment. These programs allow the entire down payment and closing costs to be gifted from a family member. These programs also allow borrowers with past credit challenges such as late payments, collections, or even bankruptcies to buy a home after maintaining at least 12 months good credit history. FHA loans also allow buyers to qualify for a larger loan by allowing higher debt to income ratios, co-borrowers who don't live in the home, and lower initial interest rates. FHA loans also allow the sellers to pay all closing costs. The downside to these loans is that the loan limit is set by county and there is a mortgage insurance premium of 2.25% of the loan amount which is added to the base loan to calculate the total loan amount.

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11) What is a VA mortgage?
Veteran's Administration (VA) mortgages are issued to US veterans and allow veterans to buy a home with no down payment and allow the sellers to pay all closing costs. These loans are very attractive due to the fact that they allow higher debt to income ratios and allow previous credit delinquencies.

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12.) What is APR (Annual Percentage Rate)?
APR stands for annual percentage rate and reflects the actual interest rate including other finance charges such as private mortgage insurance premiums, discount points and other financing costs you pay to obtain the loan.

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