?What is an FHA loan?
Mortgage lenders need some kind of assurance that they can recover their monetary losses in the event that a homebuyer defaults on a home loan. The Federal Housing Administration (FHA) insures these mortgage loans to insulate lenders from the risk they assume whenever they grant a large loan. FHA loans are particularly useful for low-income or first-time homebuyers who cannot afford a traditional down payment of 20%, or for prospective buyers that are affected by bad credit scores. Because the lending requirements are less strict than with a conventional mortgage loan, homebuyers must meet a few specifications: an upfront mortgage insurance premium (UFMIP) of 1.75% at the time of closing, as well as a monthly mortgage insurance premium (MIP) based on the borrower’s loan-to-value ratio. Overall, FHA-insured home loans are a great tool to boost the housing market and to help families find affordable homes.
?What is an FHA Streamline Refinance?
The Federal Housing Administration (FHA) recently developed a program to help homeowners reduce their interest rates with little or no out-of-pocket costs. This is called FHA Streamline Refinance, which allows the borrower to seek a refinancing option without a home appraisal, income verification, or in-person application. FirstTrust Financial can help FHA homeowners just like you find a refinance option that works for your financial situation. Our team can pay the refinancing costs in exchange for a higher interest rate or we can help you obtain market rates by rolling the closing costs into the new loan package. To qualify for Streamline Refinance, the borrower’s original loan must be FHA-insured and the borrower must be up-to-date with mortgage payments, with at least the last 12 months paid off. The refinance must lower both the principal and the interest payments of the previous mortgage payment.
?What is a VA loan?
A mortgage loan that is backed by the U.S. Department of Veterans Affairs (VA) is often referred to as a VA loan and can be issued by qualified, private lenders. VA loans are designed to provide long-term housing and financing options for American veterans that have served in the armed forces. The Department of Veterans Affairs does not issue mortgage loans itself, but it does back loans that are made by private lenders. The advantages of a VA loan are many, including up to 100% in financing options. Often times, a down payment is not needed by a VA loan (unless required by the lender), giving veterans even more freedom in finding property that’s right for them. In addition, VA loans do not require private mortgage insurance (PMI), which means that payments go directly towards qualifying for the loan amount. VA-backed loans generally allow more flexible payments, as closing costs can be directly rolled into the mortgage over time.
?What is a VA Streamline (IRRRL)?
VA loan Streamlines, or Interest Rate Reduction Refinance Loans (IRRRL), allow veterans to seek a lower rate on their mortgage. This refinancing option does not require income verification, property appraisal, or credit reports, so this is usually a low-cost refinancing option. In order to qualify for a VA loan Streamline, you must already have a VA loan with at least 12 months of recent payments. While you cannot receive any cash back from the refinance, you can receive up to $6,000 in credit for energy efficient home improvements.
?What is a Reverse Mortgage?
Reverse mortgages, or home equity conversion loans, allow long-standing homeowners to gain value from the equity of their property without selling. The lender will pay the homeowner money based on equity the home or property has gained in recent years, either in the form of a lump sum, line of credit, or monthly allowance. Not until the homeowner actually sells the property (or ceases to use it as their primary residence) will they have to repay the lender, including any interested. Most reverse mortgage plans require the homeowner be at least 62 years old with little or no mortgage payments remaining on the home. In many ways, these reverse mortgages are perfect for retired residents who need another form of income to supplement their living expenses. What kind of reverse mortgage do you qualify for? To speak with a senior analyst, contact FirstTrust Financial to gain an inside edge on how you can live more comfortably and affordably off the equity of your own home. It is also important to note that reverse mortgage disbursements are tax-free, do not affect Social Security or Medicare benefits, and can be spent however the homeowner chooses.
?What is a credit score?
Before a lender will actually issue a loan to a borrower, they want to understand how well that individual can uphold their financial obligations. This obviously includes the borrower’s loan history and their ability to pay off loans fully and on-time. First, they look at your income-to-debt ratio to see what other monetary debts you may currently have. Then, they consult your FICO credit score, a number between 350 (high risk) and 850 (low risk), which quantifies your previous loan performance. This score is based only on a client’s credit profile (or their credit history), and does not take into consideration income, down payments, or any demographic factors. Generally, FICO scores reflect both positive and negative credit information – late payments will lower the score, while a history of timely payments will raise your score. The FICO score also consists of different components: 35% is based on payment history, 30% is current level of debt, 15% is the duration of credit, another 15% is the type of loan options available to you (student loans, car loans, etc.), and the remaining 5% is a predictor for future credit. As you can see, credit scores are a complex but vital part of the home buying process. All prospective buyers must establish credit before applying for a mortgage.
?How can I dispute my credit report?
As described in the question above, FICO credit scores are indicative of your credit history and previous loan payments. Because your credit report is thoroughly examined before a mortgage loan is offered, it is important that the information in that report is both complete and accurate. Under the Fair Credit Reporting Act (FCRA), credit reporting agencies and credit card companies must correct any errors or false information on your report. If you find that an error may be lurking in your credit report, then you need to act fast to resolve this issue. First, get a complete copy of your credit report from all three of the major credit reporting agencies (CRA): Equifax, Experian, and TransUnion. Next, file a written complain with the respective agency, explaining the error and providing any documents or information that would prove that a payment was made or information is false. Keep a detailed log of any information you send to these agencies to track the progress of your credit repair process and request a return receipt so you can see what exact information the credit reporting agency received. Based on the FCRA, the credit reporting agency now has 30 days to investigate the merits of your credit revision. If the CRA finds an error, they must correct it and notify other agencies of the change, including any companies that have requested a credit report in the past 6 months. You will also be sent a free copy of the updated report. This process is certainly not the easiest or most expedited, but it is an essential part of securing a home loan for your family.
?What is a FICO score?
First introduced in 1989, FICO scores are the most widely used credit metric in the United States. The three major credit reporting agencies (Experian, Equifax, and TransUnion) each create their own FICO score, which sometimes use different information in their calculations, so it is very possible that your credit score is slightly different from one agency to the next. In general, higher loan amounts will translate to a greater credit score. This also factors in your utilization ratio: the amount owed divided by the loan amount. The lower the utilization ratio, the higher your credit score.
?How can I improve my credit score?
Credit is built up over large periods of time. It is virtually impossible to greatly improve your credit score overnight. To build up a high credit score, this is a long-term process that usually takes years (or even decades). While these changes can’t happen at the drop of a hat, it is possible to use some credit strategies today to make your mortgage application even stronger in the future. Some estimates even point out that the right credit strategy can boost your score by as much as 50 points every year, as long as any major credit setbacks don’t occur. Because the bulk of a credit score is based on payment history and amounts owed, the first and most important thing you can do is continue to pay off monthly credit card payments. You should also work to pay off any outstanding debts so that this is not leveraged against your credit score. In addition, requesting a copy of your credit report from major credit reporting agencies like Experian, Equifax, and TransUnion is an essential part of monitoring your credit and ensuring that there are no errors in your credit history. You can also seek a credit repair organization to help you negotiate and resolve any discrepancies in your credit score. Never ‘max out’ your line of credit and don’t sign up for a new credit card without having the funds to support it.
?What is a downpayment?
A down payment is a portion of the total cost of the home or property that the buyer pays up front at the time of closing. Your down payment might range anywhere from 3% to 20% of the sales price, and this amount affects the types of loans you can apply for. Federally insured loans like FHA mortgages can help homebuyers lower their initial down payment. New buyers can also use a variety of strategies to help cover the initial cost of the property. For example, it is possible for buyers to borrow funds from an Individual Retirement Account (IRA) or 401(k) plan, though this might result in withdrawal penalties. Prospective homebuyers can also set up a program with their bank to automatically extract funds from their paychecks into a savings account. Generally speaking, when a home buyer puts more money toward the down payment, the mortgage lender is assuming less risk and can therefore offer better interest rates.
?What is an alternative downpayment?
For young or first-time homebuyers, saving up the funds for a large down payment can be extremely difficult. One possible source of funds is via a down payment gift, which is money that is accepted from an outside source without the expectation of being paid back. Down payment gifts cannot come from anyone, so they are most often received from family members and sometimes employers. Another option is to seek help from a down payment assistance program. These operate like charities and provide financial support to families in need, but it is important that buyers do their due diligence beforehand and thoroughly research the organization – sometimes these groups can dupe homeowners into bad loans or payments. Homeowners should always consult with a mortgage professional or real estate advisor before accepting funds from a down payment assistance group. Finally, homeowners can pursue a zero-down mortgage loan, which provides 100% financing rather than a down payment deposit. These are often secured through a VA loan, but can also be found through other private lenders, which will in turn raise their private mortgage insurance (PMI) rates. At FirstTrust Financial, we can help you find the down payment system that works best for your family.
?What is the difference between pre-qualified and pre-approved?
Before you can secure a mortgage loan on a home or property, financial institutions will either pre-qualify or pre-approve you for certain types of loans. These terms are frequently used in the real estate industry, but what exactly do they mean? In a nutshell, a pre-qualified buyer is one that has already discussed their debt, income, assets, and financial goals with a mortgage advisor and is eligible to borrow. To become pre-qualified, this is usually a simple procedure, where the lender or mortgage agency will estimate a loan amount you might qualify for. Pre-qualification simply means that you are prepared to fill out a mortgage application, but haven’t quite taken the steps necessary to secure one. On the other hand, the pre-approval process is more rigorous, and the lender or mortgage agency will complete an in-depth analysis of your credit history and ability to purchase a home. This means that you will also fill out an entire mortgage application, which will then be sent the lender(s) that best fit your needs. Once the application is complete, a lender will send you a loan offer with the exact amount they are willing to provide. Buyers are not required to accept a loan once they are pre-approved; this way they can weigh their options to find the mortgage that’s right for them. A financial team like FirstTrust can expedite your pre-approval process, making sure that your mortgage application is sent to lenders that will offer competitive interest rates and terms.
?What are closing costs?
Real estate closings are the final step in the home buying process. Buyers usually pay between 2% and 5% of the property’s sales price in closing fees. The lender must usually provide a good faith estimate of the closing costs within 3 days of your mortgage application. Closing costs can include all types of administrative expenses like: attorney’s fees, appraisal fees, title insurance, escrow deposit, underwriting fees, loan origination fees, and credit report fees. All of these added costs can increase the buyer’s total bill by thousands of dollars at the time of closing. There are some strategies that can lower closing costs, though. Discount points, for example, are fees that you can pay at the time of closing that will in turn lower you interest rate (typically 1% of the total loan amount equals 1 point). Buyers can also find a no-closing cost mortgage, which will reduce upfront expenses, but raise long-term payments. Sometimes the buyer can even negotiate reduced closing costs with the seller.
?What is a debt-to-income ratio?
Your debt-to-income ratio is a complex value based on how much money you can afford for a monthly mortgage payment based on outstanding debt obligations. Debt-to-income ratios consider a borrower’s annual income in relation to mortgage/rent payments, credit card payments, car loans, and other extemporaneous obligations like student loans or child support. To apply for certain loans, there is often a qualifying ratio that must be met – usually this is a 28/36 debt-to-income ratio. Outstanding credit scores can improve your mortgage application even if your amount of debt exceeds the loan guidelines, so this debt limit is very fluid and can vary dramatically depending on the buyer and type of loan. For instance, an FHA loan will allow the buyer to have higher debt limit, with a 29/41 qualifying ratio. Prospective homebuyers can find out their debt-to-income ratio by using online calculators or simply meeting with FirstTrust Financial.
?What are the advantages of fixed rate versus adjustable rate loans?
When a buyer is seeking a mortgage loan, they have a variety of options to choose from. Those options obviously include both fixed-rate and adjustable rate mortgages. For fixed-rate mortgage loans, the monthly principal payment and interest rate remain the same for the entire life of the loan. You can expect consistent payments from month to month with this type of loan, even if your property taxes go up or if your homeowner’s insurance premium changes. During the early amortization phase of a fixed-rate loan, most of your monthly payments go towards the loan’s interest, while a smaller portion is used for the principal. This trend gradually reverses as the loan progresses, so that a greater percentage of each payment is used for the principal rather than interest. An adjustable rate mortgage (ARM), on the other hand, can use just about any value for the monthly rate, based on a specified outside index, like the 6-month Certificate of Deposit (CD) rate or one-year Treasury Security rate. This rate may adjust annually or bi-annually depending on the terms of the loan, but there may also be an interest rate cap or payment cap, which limits how much this value can increase over time. Almost all ARM’s have a “lifetime cap” at the very minimum, stating that the interest rate can never exceed a certain amount. Adjustable rate mortgages give homeowners very low interest rates at the beginning of the loan, making it very attractive for buyers, but these payments gradually increase as the mortgage ages. The ‘introductory rate may be set for three years, five years, or even ten years, so this type of mortgage loan is best for families that are anticipating moving homes or those that are predicting higher future earnings.
?What is an escrow and how does it work?
Escrow accounts are financial deposits that are transferred from one party to another after the completion of specified tasks. In real estate and mortgage transactions, this means that the escrow holder must supervise all conditions of the buyer’s and seller’s agreement before the closing can actually take place. The escrow holder will make sure that all documents have been filed, closing costs have been finalized, titles and liens are cleared, and the property sale is otherwise complete. Expenses from title insurance, inspections, and real estate commissions are held in escrow until these conditions are met. Upon property title transfer, a Mortgage Escrow Account will be created to pay ongoing expenses like property taxes and home insurance. The buyer will usually fund some money toward the escrow account at the time of closing and remaining expenses are completed through monthly mortgage payments.
?What is Private Mortgage Insurance (PMI)?
Mortgage lenders assume a great deal of risk when they extend a loan for hundreds of thousands of dollars to a borrower. As a way to minimize their potential losses, mortgage lenders will require you to pay monthly insurance premiums, just in case you default on your loan – this is called private mortgage insurance (PMI). Your annual PMI rate can vary depending on the loan’s terms, but usually falls somewhere between .3% and 1.5% of the total amount. This rate will usually be lower with a large down payment and significantly higher with a small down payment. If your down payment makes up the conventional 20% of the loan, then you probably won’t be required to pay for private mortgage insurance. The annual PMI rate is paid in monthly installments along with the regular mortgage payments and these can sometimes be tax-deductible. It is important to note that PMI can be canceled after certain conditions are met. This usually occurs when the buyer has made enough loan payments to reach 80% of the property’s original value. FHA loans also require mortgage insurance premiums, which are slightly different than PMI’s in that they remain in place for the entire life of the loan. As a rule of thumb, homebuyers generally do not want to pay for mortgage insurance, but it is a necessary result if down payment requirements aren’t met. FirstTrust Financial can work with your family to find a mortgage loan that offers an attractive PMI rate.