Smart Mortgage Buyer – Glossary
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-qualification letter. Mortgage pre-approval includes all the steps of a full mortgage approval, except for the appraisal and title search. Pre-approval can put you in a better negotiating position, similar to that of a cash buyer.
WHEN DOES IT MAKE SENSE TO REFINANCE?
Usually people refinance their mortgage 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-rate 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:
#1 Calculate the total cost of the refinance
#2 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.
Start by trying our online mortgage calculator to get a basic idea of refinancing numbers. Then, since refinancing is a complex topic, consult a mortgage financing professional for more personalized information.
WHAT IS A HOME LOAN 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 home loan. A pre-qualification is subject to verification of the information provided by the applicant. A pre-qualification is short of mortgage approval or pre-approval because it does not take account of the credit history of the borrower.
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.
WHAT IS A JUMBO MORTGAGE?
A jumbo mortgage is any mortgage financing amount larger than the maximum eligible for conforming purchase by the two federal agencies, Fannie Mae and Freddie Mac.
WHAT IS A CONFORMING LOAN?
A loan eligible for purchase by the two major federal agencies that buy mortgages, Fannie Mae and Freddie Mac.
WHAT IS A GOOD FAITH INVESTMENT?
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.
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.
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.
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 mortgage financing 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.
WHAT IS THE DIFFERENCE BETWEEN A MORTGAGE BROKER AND A LENDER?
A mortgage broker counsels you on the loans available from different mortgage financing 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 and receive mortgage approval.
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.