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| Frequently Asked Questions >Mortgage Loans >Credit Repair Q: What are the greatest myths about Credit Repair? A: There are several myths about credit repair; to learn more click here. Q: What is an Adjustment Period or Frequency (ARM)? A: The mortgage-rate formula is applied to recalculate your interest rate on an adjustable-rate mortgage. Some loans adjust monthly but more typical is an adjustment every six or twelve months. Common practice is for the start rate to hold constant for a number of years, usually two to seven years, and then adjust once a year or every six months thereafter. Q: What is an Annual Percentage Rate (APR)? A: The annual percentage rate, found on your truth in lending form, adjusts the mortgage interest rate to reflect estimated closing costs, including points paid at closing and mortgage insurance. Q: What is an Application and Processing Fee? A: Most lenders charge to complete your paperwork and process it through a underwriting (loan evaluation) department. The justification for this fee is that if your loan is rejected or you decide not to take it, the lender needs to cover the costs. Q: What is an Appraisal? A: The property for which you are borrowing money needs to be valued. If you default on the mortgage, a lender doesn’t want to get stuck with a property worth less than you owe. Q: What is a Conforming Loan? A: A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac. The loan limits are currently $322,700 for a single family house. Q: What is a Credit Report? A: Many lenders charge a fee for the cost of obtaining a copy of your credit report. This report tells the lender whether you’ve naughty or nice to lenders in the past. If you have problems or discrepancies with your credit report, get them cleaned up before you apply for a mortgage loan. Q: What is a Full Doc Loan? A: 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. Q: What is a Good Faith Estimate? A: 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. Q: What is an Interest Rate? A: The interest rate is what the lender charges you for borrowing their money. Unlike credit card interest rates, which are usually double-digit rates, fixed-rate loans are much lower. Q: What is a Jumbo Mortgage? A: A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, currently $322,700. Q: What is the difference between a Mortgage Broker and a Mortgage Lender? A: 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. Q: What is a Mortgage-Rate Formula (ARM)? A: All adjustable-rate mortgages are base on the following formula, which specifies how the interest rate will be set on your loan in the future. Index + Margin = Interest Rate
Q: What is Negative Amortization? A: As you make payments over time, the loan balance you still owe is gradually reduced, this process is known as amortizing the loan. The reverse of this process, an increase in your loan balance, is called negative amortization. This can happen if your mortgage payment is less than it really should be. Some loans cap the increase of your monthly payment, but not that of the interest rate. The size of your mortgage payment may not reflect all the interest that you owe on your loan. So, rather than paying off some of your loan balance (or principle) every month, you’re paying off some but not all of the interest you owe. Thus, the extra unpaid interest you still owe is added to your outstanding debt. Q: What is a Non-Conforming Loan? A: A loan not eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac. This is usually due to a low credit score. Q: What does Stated Income with Verified Assets mean? A: 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. Q: What does Stated Income with Stated Assets mean? A: Both income and assets are disclosed but not verified. However, the source of the borrower's income is verified. Q: What does No Ratio mean? A: 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. Q: What does No Income mean? A: Income is not disclosed, but assets are disclosed and verified, and must meet an adequacy standard. Q: What does Stated Assets or No Asset Verification mean? A: Assets are disclosed but not verified; income is disclosed, verified and used to qualify the applicant. Q: What does No Assets mean? A: Assets are not disclosed, but income is disclosed, verified and used to qualify the applicant. Q: What does No Income with No Assets mean? A: Neither income nor assets are disclosed. Q: What are Points? A: Points are fees paid up front to your lender when you close the loan. Points are actually percentages: One point is equal to 1 percent of the loan amount. So when a lender tells you that there are 1.5 points on a quoted loan, you pay 1.5 percent of the amount you borrow as points. On $100,000 loan, for example, 1.5 points costs you $1500. If you are willing or want to pay more points on a given loan, the lender should reduce the interest rate. If you want to pay fewer points, your interest rate increases. You may want to take a higher interest rate on you mortgage if you don’t have enough cash to pay a lot of points, which are paid up front when you close the loan. On the other hand, you may want to pay more points because the interest rate on your loan determines you payments over a long period of time, usually 15 to 30 years. Q: What does Pre-Qualification mean? A: 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. Q: What does Pre-Approval mean? A: The pre-approval process is much more complete than pre-qualification. It 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. Q: What are Prepayment Penalties? A: You pay this charge, usually 2 to 3 percent of the loan amount, when you pay off the loan before you’re supposed to. Typically, prepayment penalties don’t apply when you pay off a loan because you sell the property. But when you refinance a loan with prepayment penalties, you have to pay the penalty. Q: What is a Rate Lock? A: 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. Q: What is a Rate Cap (ARM)? A: Once the initial interest rate expires, the interest rate fluctuates based on the formula of the loan. Almost all adjustable-rate mortgages come with a rate cap, which limits, or caps, the maximum rate change (up or down) allowed at each adjustment. This may be referred to as the adjustment cap. On most loans that adjust every six months, the adjustment cap is 1 percent. In other words the interest rate can move up or down no more than 1 percent in a given adjustment period. Loans that adjust more than once per year usually limit the maximum rate change allowed over the entire year as well. On the vast majority of such loans, 2 percent is the annual rate cap. Finally, almost all adjustable-rate mortgages come with lifetime caps. These caps limit the highest rate allowed over the entire life of the loan. It is common for adjustable-rate mortgages to have a lifetime cap of 5-6 percent higher than the initial start rate. Q: What is a Start Rate (ARM)? A: This is the interest that your mortgage begins with. It is common for this rate to increase between 1 and 2 percent during the course of an adjustable-rate mortgage. |
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