Frequently Asked Questions

When should I refinance?

A loan refinance can accomplish various goals. Monthly payments can be reduced by lowering the interest rate with a rate and term refinance.  A home can be paid off at a milestone date (such as retirement) by refinancing to a shorter term (i.e. 10 or 15 year) loan. A cash out refinance can provide funds to consolidate debt, pay for education or wedding expenses, or provide funds to invest. A refinance can also convert an adjustable rate loan or interest only loan to a safer fixed rate loan.  

What are points?

Loan origination points are commonly charged as a fee for the work associated with originating a loan. For a loan of $100,0000, a loan origination fee of one point fee is $1,000.  Discount points are fees used to permanently lower the interest rate on a mortgage loan. Loans with lower rates are more expensive because the lender receives less interest income. Conversely, higher rates provide more interest income, which enables lenders to internally cover loan origination points and can provide a lender credit to cover other closing costs.

Should I pay points to lower my interest rate?

Maybe. If you are certain that you will keep the loan more than 5 years, it generally pays to select a loan with a lower rate. Paying discount points to lower the loan's interest rate is a good way to lower your required monthly loan payment, and possibly increase the loan amount that you can afford to help buy a nicer home. However, if you plan to stay in the property for less than five years, your monthly savings may not be enough to recoup the cost of the discount points that you paid at close for the lower rate.

What is an APR?

The annual percentage rate (APR) is an interest rate reflecting the cost of a mortgage as a yearly rate. The APR is typically higher than the note rate, because it takes into account loan origination and discount points and other pre-paid finance charges. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders and helps prevents lenders from advertising a low rate and hiding fees.

The APR does not affect your monthly payments. Your monthly payments are strictly a function of the note rate and the length of the loan.

Because APR calculations are effected by the various fees charged by lenders, a loan with a lower APR is not necessarily a better. The best way to compare loans is to ask your loan officer to provide you with a settlement worksheet reflecting their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. You can then delete the fees that are independent of the loan such as homeowner's insurance, title fees, escrow fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.

The following fees are generally included in the APR:

  • Points - both discount points and origination points
  • Pre-paid interest. The interest paid from the date the loan closes to the end of the month.
  • Loan-processing fee
  • Underwriting fee
  • Document-preparation fee
  • Private mortgage-insurance
  • Escrow fee

The following fees are normally not included in the APR:

  • Title or abstract fee
  • Home-inspection fees
  • Recording fee
  • Transfer taxes
  • Credit report fees
  • Appraisal fee

What does it mean to lock the interest rate?

Locking the loan means a mutual agreement between the borrower and lender to set the interest rate and fees for the loan. A loan typically floats up and down during the loan processing phase, much like a stock's price. Working together, the loan officer and borrower decide when to lock the loan. Once it is locked, the lender provides disclosures that verify the terms of the lock; namely, the interest rate, discount point or loan origination fees (if any), and length of the lock. 

What documents do I need to prepare for my loan application?

Below is a list of documents that are required when you apply for a mortgage. However, every situation is unique and you may be required to provide additional documentation. 

Your Property

  • Copy of signed sales contract including all counter offers
  • Name and contact information for your Realtor, insurance agent and escrow company.

Your Income

  • Copies of your pay-stubs for the most recent 30-day period and year-to-date
  • Copies of your W-2 forms for the past two years
  • Copies of the last two federal income tax returns
  • Names and addresses of all employers for the last two years

 If you will use Alimony or Child Support to qualify:

  • Provide divorce decree/court order stating amount, as well as, proof of receipt of funds for last year

If you receive Social Security income, Disability or VA benefits:

  • Provide award letter from agency or organization

Source of Funds and Down Payment

  • Sale of your existing home - provide a copy of the signed sales contract on your current residence and statement or listing agreement if unsold (at closing, you must also provide a settlement/Closing Statement)
  • Savings, checking or money market funds - provide copies of bank statements for the last 2 months

How is my credit judged by lenders?

Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points -- a credit score -- helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.

The most widely use credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. Your score will fall between 350 (high risk) and 850 (low risk).

Because your credit report is an important part of many credit scoring systems, it is very important to make sure it's accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:

Equifax: (800) 685-1111
Experian (formerly TRW): (888) EXPERIAN (397-3742)
Trans Union: (800) 916-8800
These agencies may charge you up to $9.00 for your credit report.

You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. This free credit report may not contain your credit score and can be requested through the following website: https://www.annualcreditreport.com

What can I do to improve my credit score?

Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change -- but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application.

Nevertheless, scoring models generally evaluate the following types of information in your credit report:

  • Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
  • What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
  • How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
  • Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.
  • How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.

Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.

To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.

What is an appraisal?

An appraisal is an estimate of a property's fair market value. It's a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The appraisal is performed by an "Appraiser," typically a state-licensed professional, who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.

What is PMI (Private Mortgage Insurance)?

On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. Sometimes you may need to pay up to 1-year's worth of PMI premiums at closing which can cost several hundred dollars. 

What is 80-10-10 financing?

Surprising as it may seem, some folks with hefty incomes find that it’s mighty tough for them to save enough money to make a 20% cash down payment on their dream homes. Using conventional financing, such buyers must purchase Private Mortgage Insurance (PMI) which increases the cost of home ownership and, ironically, makes it even more difficult to qualify for the mortgage. However, if you’re a dues-paying member of the cash-challenged class, don’t despair. Given that your income is sufficiently high, it’s eminently possible to avoid getting stuck with PMI. That is why 80-10-10 financing was invented. It is called 80-10-10 because a savings and loan association, bank, or other institutional lender provides a traditional 80% first mortgage, you get a 10% second mortgage, and make a cash down payment equal to 10% of the home’s purchase price. By using this method, you are no longer obligated to take out PMI on your property.

The same principle applies if you can only afford to make a 5% down, 80-15-5 financing is also available. However, because a smaller cash down payment increases the lender’s risk of default, do not be surprised when you are asked to pay higher loan fees and a higher mortgage interest rate for 80-15-5 than you pay for 80-10-10.

What happens at closing ?

The property is officially transferred from the seller to you at "closing." 

At closing, the ownership of the property is officially transferred from the seller to you. This may involve you, the seller, real estate agents, title or escrow firm representatives.  

Most paperwork in closing or settlement is done by escrow companies, working closely with the lender and title company.  

Prior to closing you should have a final inspection, or "walk-through" to insure requested repairs were performed, and items agreed to remain with the house are there such as drapes, lighting fixtures, etc.

In California the settlement is completed by an escrow firm in which you forward all materials and information plus the appropriate wire or cashier's checks so the firm can make the necessary disbursement.  Once the loan is funded, escrow ccordinates with title to have the transfer deed recorded. Upon confirmation that the deed recorded, the sale is complete.