FAQ’s: Mortgage Companies in Omaha, Nebraska
- What is the difference between pre-approval and pre-qualification?
- When does it make sense to refinance?
- What is a rate lock?
- What is the difference between a mortgage broker and a lender?
- Will I save money going directly to a mortgage lender?
- What is a full documented loan?
- What are the other types of loans?
- What is a good faith estimate?
- What is a conforming loan?
- What is a jumbo mortgage?
- What are points?
- What is a pre-qualification?
What is the difference between pre-approval and pre-qualification?
The pre-approval process is much more complete than pre-qualification. For pre-qualification, the loan officer asks you a few questions and provides you with a pre-qual letter. Pre-approval includes all the steps of a full approval, except for the appraisal and title search. Pre-approval can put you in a better negotiating position, much like a cash buyer.
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When does it make sense to refinance?
Usually people refinance to save money, either by obtaining a lower interest rate or by reducing the term of the loan. Refinancing is also a way to convert an adjustable loan to a fixed loan or to consolidate debts. The decision to refinance can be difficult, since there are several reasons to refinance. However, if you are looking to save money, try this calculation:
Calculate the total cost of the refinance
Calculate the monthly savings
Divide the total cost of the refinance (#1) by the monthly savings (#2). This is the “break even” time. If you own the house longer than this, you will save money by refinancing.
Since refinancing is a complex topic, consult a mortgage professional.
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What is a rate lock?
A rate lock is a contractual agreement between the lender and buyer. There are four components to a rate lock: loan program, interest rate, points, and the length of the lock.
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What is the difference between a mortgage broker and a lender?
A mortgage broker counsels you on the loans available from different wholesalers, takes your application, and usually processes the loan which involves putting together the complete file of information about your transaction including the credit report, appraisal, verification of your employment and assets, and so on. When the file is complete, but sometimes sooner, the lender “underwrites” the loan, which means deciding whether or not you are an acceptable risk.
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Will I save money going directly to a mortgage lender?
Not necessarily. In fact, if you are a reasonably astute shopper, you will probably do better dealing with a mortgage broker. Mortgage brokers do not add any net cost to the lending process, because they perform functions that would otherwise have to be done by employees of the lender. Furthermore, because mortgage brokers deal with multiple lenders — in a typical case, 25 to 30, sometimes more — they can shop for the best terms available on any given day. In addition, they can find the lenders who specialize in various market niches that many other lenders avoid, such as loans to applicants with poor credit ratings, loans to borrowers who do not intend to occupy the property, loans with minimal or no down payment, and so on.
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What is a full documented loan?
Both income and assets are disclosed and verified, and income is used in determining the applicant’s ability to repay the mortgage. Formal verification requires the borrower’s employer to verify employment and the borrower’s bank to verify deposits. Alternative documentation, designed to save time, accepts copies of the borrower’s original bank statements, W-2s and paycheck stubs.
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What are the other types of loans?
Stated income/verified assets: Income is disclosed and the source of the income is verified, but the amount is not verified. Assets are verified, and must meet an adequacy standard such as, for example, 6 months of stated income and 2 months of expected monthly housing expense.
Stated income/stated assets: Both income and assets are disclosed but not verified. However, the source of the borrower’s income is verified.
No ratio: Income is disclosed and verified but not used in qualifying the borrower. The standard rule that the borrower’s housing expense cannot exceed some specified percent of income, is ignored. Assets are disclosed and verified.
No income: Income is not disclosed, but assets are disclosed and verified, and must meet an adequacy standard.
Stated Assets or No asset verification: Assets are disclosed but not verified, income is disclosed, verified and used to qualify the applicant.
No asset: Assets are not disclosed, but income is disclosed, verified and used to qualify the applicant.
No income/no assets: Neither income nor assets are disclosed.
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What is a good faith estimate?
It is the list of settlement charges that the lender is obliged to provide the borrower within three business days of receiving the loan application.
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What is a conforming loan?
A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac.
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What is a jumbo mortgage?
A mortgage larger than the maximum eligible for conforming purchase by the two Federal agencies, Fannie Mae and Freddie Mac.
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What are points?
It is an upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., “2 points” means a charge equal to 2% of the loan balance.
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What is a pre-qualification?
This is the process of determining whether a customer has enough cash and sufficient income to meet the qualification requirements set by the lender on a requested loan. A pre-qualification is subject to verification of the information provided by the applicant. A pre-qualification is short of approval because it does not take account of the credit history of the borrower.
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The Obama Administration has introduced a comprehensive Financial Stability Plan to address the key problems at the heart of the current crisis and get our economy back on track. A critical piece of that effort is Making Home Affordable, a plan to stabilize our housing market and help up to 7 to 9 million Americans reduce their monthly mortgage payments to more affordable levels.The Home Affordable Refinance Program gives up to 4 to 5 million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac an opportunity to refinance into more affordable monthly payments. The Home Affordable Modification Program commits $75 billion to keep up to 3 to 4 million Americans in their homes by preventing avoidable foreclosures.Our consumer website provides homeowners with detailed information about these programs along with self-assessment tools and calculators to empower borrowers with the resources they need to determine whether they might be eligible for a modification or a refinance under the Administration’s program. Through this website, borrowers can also connect with free counseling resources to help with outstanding questions; locate homeowner events in their communities; find a handy checklist of key documents and materials to have ready when making that important call to their service provider as well as FAQs from borrowers in similar circumstances; and much more.We hope that you will find this website informative and useful as we all work together to solve our nation’s housing crisis and put our country on the path to a lasting economic recovery.
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Example #1 Meet Brian and Lisa – They need to refinance their mortgage
Brian and Lisa have steady jobs – Brian is a high school teacher, Lisa is a nurse. They pay their bills on time, including their monthly mortgage payment. Like many homeowners, Brian and Lisa are unable to refinance to a lower interest rate because the value of their home value has declined.
Do Brian and Lisa qualify to refinance to a lower interest rate under the new plan? They may because they meet the following requirements:
- They own a one- to four-unit home.
- The loan on their home is owned or guaranteed by Fannie Mae or Freddie Mac.
- They are current on their mortgage payments and have not been 30 days late making a payment within the past 12 months.
- Their mortgage is no more than 105% of the value of their home; in this case they owe $258,000 on their first mortgage but their home value dropped to $250,000.
Like Brian and Lisa, you may be able to refinance to take advantage of lower interest rates to reduce your mortgage payments. If so, here are the answers to some of the questions you may be asking.
How do I know if I have a Fannie Mae or a Freddie Mac loan?
You can call or fill out an online request form to find out if Fannie Mae or Freddie Mac owns or guarantees your loan.
How do I know if I am eligible?
Eligible loans include those where the first mortgage (including any refinancing costs) does not exceed 105 percent of the current market value of the home. For example, if your home is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.
I have both a first and second mortgage. Do I still qualify to refinance under the program?
You may only refinance your first mortgage. If that mortgage is less than 105 percent of the value of the property, you may qualify.
Your eligibility will depend on whether you are able to make the new payments on the first mortgage. The lender on your second mortgage must agree to remain in the second position.
Will refinancing lower my payments?
Generally yes. If your mortgage interest rate is higher than the current market rate you should see an immediate reduction in your payments. If your existing mortgage requires you to pay interest only and no principal, or if you are currently paying only a low introductory (or “teaser”) rate, you may not see your current payment go down. However, refinancing to a low, fixed rate mortgage can reduce the risk of payment shock when your monthly payment amount changes, and refinancing could save you a great deal of money over the life of the loan.
What would my new interest rate be?
The rate will be based on market rates at the time of the refinance and any associated points and fees quoted by the lender.
Will refinancing reduce the amount that I owe on my loan?
No, refinancing will not reduce the amount you owe on your loan or any other debt you may have. However, by locking in a low fixed interest rate, it should save money over the life of the loan.
When can I apply?
You can apply now, and should reach out to your servicer or a housing counselor to determine if you qualify.
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Here are a few key terms that you should know:
- Annual percentage rate (APR): The interest rate associated with your credit as a yearly rate. APR is a combination of broker fees, points, interest rate, and other credit charges. It usually depends on your credit history, your mortgage broker, your loan amount, and your payment terms.
- Balloon mortgage: This type of loan starts off as short-term fixed-rate mortgage, with an interest rate that is significantly lower than the current rate, and then changes into an adjustable-rate mortgage. The loan is amortized over a 30-year period, with the first payments applied towards interest, and a lump sum “balloon” payment due at the end of the term (typically 3, 5 or 7 years). Eligibility for a balloon mortgage is much easier than for a conventional 15 or 30-year mortgage, and the interest rate and monthly payments tend to be lower.
- Caps on Rates and Payments: Rate caps represent the maximum percent increase that can occur at each interval of adjustment. Payment Caps represent the maximum amount that a payment can go up at each interval adjustment.
- Collateral: This is the security pledged by a borrower in exchange for a loan or other form of credit. Typical assets include real property, an automobile, inventory, cash, accounts receivables, and securities. In the event of non-repayment of the loan or default, the lender may seize and sell the collateral
- Conforming loan: This type of mortgage falls within the dollar amount limit, terms and conditions established by Freddie Mac and Fannie Mae.
- Credit report: A detailed overview of a prospective borrower’s creditworthiness, credit record including bankruptcies, late payments, and current and past debts, and public records compiled by a credit reporting agency.
- Credit reporting agency: Also known as a consumer reporting agency or credit bureau, this company gathers critical information about borrowers’ credit history (i.e. repayment history, debts) and sells it to lenders so that they can determine whether or not to approve a loan application.
- Debt consolidation: This is the process of taking out a new loan, usually at a lower interest rate, to pay off outstanding consumer debt such as student loans, credit cards, and auto loans. Debt consolidation enables borrowers to better tackle their indebtedness by offering them a longer repayment term and the opportunity to make one lower monthly payment (as opposed to numerous bills from multiple lenders).
- Fannie Mae (FNMA): A publicly-traded corporation that buys and guarantees mortgages that comply with its funding guidelines, packages them into securities, and sells them to investors. Through this organization’s initiatives, low-to-middle income Americans have access to a greater choice of and more affordable home ownership.
- FHA loans: FHA loans, which are insured by the Federal Housing Administration, are easy to qualify for and feature low closing costs and down payments. These loans may be used for 1) home repairs, 2) home purchase, 3) energy-efficient improvements, and 4) home renovation. Since income limits are not imposed, applicants with poor credit or financial problems may qualify for an FHA loan.
- FICO score: This number, which represents an individual’s credit rating, helps creditors determine an applicant’s credit-worthiness and decide whether or not to approve a loan. FICO scores typically range from 300 to 850, with a higher score translating into lower interest rates. The key factors used to calculate a borrower’s credit score are 1) forms of credit used, 2) new credit, 3) length of credit history, 4) balance owed, and 5) payment history.
- Forbearance agreement: Also referred to as a Special Forbearance (SFB), this type of agreement is entered into by a lender and a defaulting mortgagee, with the former agreeing not to foreclose on the property if the latter complies with a repayment plan to cure the delinquency. A forbearance agreement modifies terms so as to make them more financially-manageable for borrowers.
- Foreclosure: This is a legal proceeding whereby a creditor may repossess and sell mortgaged property upon default by the borrower who, for instance, is delinquent on payments.
- Freddie Mac: A leading, government-sponsored enterprise and publicly-traded company that creates guidelines on suitable properties, down payment, income and credit requirements, and the maximum mortgage amount. The maximum loan limit is re-set each year by Freddie Mac and Fannie Mae. Middle-income Americans have access to more affordable rentals and homeownership largely because of Freddie Mac’s efforts to keep funds flowing to creditors. Freddie Mac buys, guarantees, and packages mortgages to create securities.
- Homeowners insurance (HOI): Also referred to as hazard insurance or home insurance, this type of coverage protects against damage to a homeowner’s property and/or contents, liability for injuries incurred by third parties on the premises, and loss of use. The standard HOI policy covers damage caused by lightning, volcanoes, explosions, hail, hurricanes, theft, riots, smoke damage, vandalism, fire, or other enumerated perils. Homeowners insurance policies do not provide coverage for acts of God such as floods and earthquakes or for customary wear and tear.
- Housing Market Index (HMI): The HMI, which is based on a sample of more than 300 home builders, operates as a gauge of housing trends and demand as well as future home sales and building. The index ranges from 0 to 100, and a rating of 50 indicates that there is an average demand for new homes.
- Hybrid loans: These contain features of both an adjustable rate mortgage and a fixed rate mortgage and are easier to qualify for than conventional loans. During the first set of years (3, 5, 7 or 10), a hybrid loan boasts a considerably low fixed rate, which translates into minimum interest. For the remaining amortization term, the loan takes on an adjustable rate, which corresponds to the current market interest rate. The most common hybrid loans are 10/1, 7/1, 5/1, and 3/1, with the first digit indicating the number of years that the rate is fixed and the second digit representing the adjustment interval.
- Indexes: Guides that lenders use to measure changes in mortgage rates. Common indexes include the activity of one, three, and five-year Treasury securities. There are many others and each ARM (adjustable rate mortgage) is associated with a specific index. Some of the most common indexes are:
- Treasury Bill (T-Bill)
- Certificate of Deposit (CD)
- Constant Maturity Treasury (CMT)
- 11th District Cost of Funds Index (COFI)
- 12-Month Treasury Average (MTA)
- London InterBank Offering Rates (LIBOR)
- Prime Rate
- Jumbo home loan: A mortgage that exceeds the maximum loan limits set by Freddie Mac and Fannie Mac is referred to as a jumbo loan or non-conforming loan.
- Margins: This is essentially a lender?s markup. It is an interest rate that represents the lender?s cost of doing business and the profit they will make on the loan. This is then added to the index rate to establish the final interest rate and normally lasts through the life of a home loan.
- Mortgage banker: This is the creditor that funds and originates loans for resale to investors in the secondary market, such as Ginnie Mae, Freddie Mac, Fannie Mae and insurance providers. Mortgage bankers also service the loans in the secondary mortgage market.
- Mortgage broker: This company or individual serves as a third-party intermediary between prospective borrowers and mortgage lenders. While mortgage brokers originate loans, they do not fund them. They search for and select mortgage creditors that are likely to approve applications based on a borrower’s personal and financial circumstances.
- Mortgage calculator: This online tool enables prospective borrowers to calculate and compare monthly mortgage payments for different loan types, terms, interest rates, and amounts. Individuals need to simply enter the loan term, annual interest rate, and loan amount desired. Mortgage calculators assist consumers in determining how much home they can afford at a particular rate of interest.
- Mortgage escrow account: This mechanism protects home mortgage investors by ensuring that mortgagees’ bills (i.e. property taxes and insurance premiums) are paid in a timely manner. It also helps homeowners avoid tax delinquency or lapsed insurance protection and allows them to benefit from lower down payments and rates. Most lenders require borrowers to open a mortgage escrow account.
- Negative Amortization: Negative amortization occurs when the monthly payments don?t cover the cost of the interest. These types of loans offer payment caps as opposed to interest rate caps, which limit the amount a monthly payment can increase. Loans with a payment cap but no periodic interest rate cap may become negatively amortized. If you are unable to make a monthly mortgage payment, any unpaid interest will be added to the loan balance, increasing the overall balance. For this reason, poor financial planning can put borrowers in a deep hole quickly. There is, however, always the choice to pay the minimum monthly payment or the fully amortized amount due.
- Non-conforming loan: Also referred to as a jumbo loan, a non-conforming loan is one that exceeds the limits set by Freddie Mac and Fannie Mae or that fails to comply with the latter’s guidelines. Loans for applicants with bad credit or loans for amounts that surpass the conforming limits are classified as non-conforming loans.
- Office of Federal Housing Enterprise Oversight (OFHEO): The OFHEO is an independent agency within the Housing and Urban Development (HUD) department, and its objective is to maintain a robust national housing finance mechanism and promote housing. It does so by guaranteeing the financial soundness and capital adequacy of Freddie Mac and Fannie Mae, the two leading government-sponsored enterprises in the housing field.
- Payment Options: Represents how and when a mortgage is to be paid. There are a variety of payment options, normally, with every mortgage product. These options may vary depending on credit history and loan amount.
- Piggyback loans: This financing option involves taking out more than one loan from two or more mortgage lenders. With a piggyback loan, consumers can buy real estate with a down payment that is less than 20% of the purchase price. The most prevalent type of piggyback loan is the 80/10/10, in which a first mortgage finances 80% of the property, and a down payment and piggyback loan cover the remaining 20% of the home’s value.
- Points: Are charges paid to the lender based on the loan, usually in cash at closing. One ?point? is equal to one percent of the loan amount. You can borrow more in order to pay for points, but it will only increase to your total loan amount.
- Private mortgage insurance (PMI): This is for lenders who want to protect themselves from a loss if a borrower defaults on their loan. PMI is required for borrowers who cannot pay 20 percent of the loan for their down payment and when the amount financed is greater than 80 percent of the appraised value in refinancing.
- Recasting or Recalculating your Loan: Recasting is an adjustment to a current mortgage, or a loan modification, that does not involve a new guaranty insurance certificate. This loan involves a modification to the type of instrument that is used. This can sometimes result in the borrower saving off of reduced mortgage payments if their financial situation has improved. To recalculate your loan you can use a simple online mortgage calculator.
- Subprime loans: These mortgage loans are available to borrowers whose low income, credit rating or both disqualifies them from government loans (i.e. VA and FHA loans) and traditional loans. Subprime loans usually impose a higher interest rate and down payment due to the increased risk involved in lending to individuals with a tarnished credit history,
- Two-Step mortgage: This type of home financing loan carries a fixed interest rate during the first period, usually 5 or 7 years; afterwards, it posts the current market rate. Following the adjustment date, borrowers may opt for either a variable interest rate or a fixed interest rate for the two-step mortgage’s remaining term.
- VA loan: Military personnel such as reservists and active service members and veterans may avail themselves of Veterans Affairs loans, which typically waive a down payment and offer favorable loan terms. The fixed interest rate on a VA home loan is equivalent to or even lower than traditional mortgage rates. Advantages associated with a VA loan include: 1) no requirement that borrowers purchase private mortgage insurance and 2) governmental restriction on the appraisal fees, origination fees and closing costs that mortgage lenders can impose.
*For additional key terms and information, please visit www.hud.gov