Q: What is the difference between a Pre-Qualification and a Pre-Approval?

A Pre-Qualification is an informal estimate based on self-reported information, providing a rough idea of what you might afford. A Pre-Approval is a formal, written commitment from a lender, based on verified income, assets, and a full credit check. Pre-Approval carries much more weight with sellers and real estate agents.

Q: What is the absolute minimum down payment required for a home?

The minimum down payment depends on the loan product. VA loans and USDA loans can offer 0% down. FHA loans require a minimum of 3.5% down, and conventional loans start at 3% down for first-time buyers.

Q: What is PITI , and what does it include?

PITI stands for P rincipal, I nterest, T axes, and I nsurance. This is the total sum of your monthly mortgage obligation. The Taxes (Property Tax) and Insurance (Hazard/Homeowners) portions are often collected by the lender into an escrow account.

Q: What costs are included in the Annual Percentage Rate (APR) ?

The APR represents the true annual cost of borrowing. It includes the note interest rate plus certain required fees expressed as a percentage, such as origination fees, discount points, and private mortgage insurance premiums. It is always higher than the note interest rate and is a standardized tool used for comparing loan products.

Q: How much are closing costs, and who typically pays them?

Closing costs typically range from 2% to 5% of the loan amount. They cover third-party services like appraisal, title insurance, attorney fees, and origination fees. While the buyer traditionally pays, sellers can often contribute via seller concessions (up to a limit set by the loan type).

Q: What is the role of an Escrow Account ?

An Escrow Account (sometimes called an Impound Account) is a separate account managed by your loan servicer to hold the funds collected for your property taxes and homeowner's insurance. The servicer pays these bills on your behalf when they become due.

Q: What is a Fixed-Rate Mortgage (FRM) ?

An FRM is a loan where the interest rate remains constant for the entire repayment period (e.g., 15-year or 30-year fixed). This provides predictable monthly payments and stability.

Q: What is a Deed of Trust ?

A Deed of Trust is a security instrument used in some states instead of a traditional mortgage. It involves three parties: the borrower (Trustor), the lender (Beneficiary), and a neutral third party (Trustee) who holds the title until the loan is paid off.

Q: What is the purpose of a Purchase Agreement and what are Contingencies ?

The Purchase Agreement is the binding contract between the buyer and seller detailing the terms of sale. Contingencies are clauses that must be met for the contract to close, commonly including the Financing Contingency (loan approval) and the Inspection Contingency (satisfactory property inspection).

Q: What is Earnest Money and what happens to it at closing?

Earnest Money (or a 'good faith deposit') is a sum the buyer pays to show commitment to the sale. It is typically held in an escrow account and is applied toward the buyer's down payment or closing costs at the time of settlement. If the buyer backs out without a valid contingency, they may forfeit this money.

Question 1

What is the difference between a Pre-Qualification and a Pre-Approval?

Accepted Answer

A Pre-Qualification is an informal estimate based on self-reported information, providing a rough idea of what you might afford. A Pre-Approval is a formal, written commitment from a lender, based on verified income, assets, and a full credit check. Pre-Approval carries much more weight with sellers and real estate agents.

Question 2

What is the absolute minimum down payment required for a home?

Accepted Answer

The minimum down payment depends on the loan product. VA loans and USDA loans can offer 0% down. FHA loans require a minimum of 3.5% down, and conventional loans start at 3% down for first-time buyers.

Question 3

What is PITI, and what does it include?

Accepted Answer

PITI stands for Principal, Interest, Taxes, and Insurance. This is the total sum of your monthly mortgage obligation. The Taxes (Property Tax) and Insurance (Hazard/Homeowners) portions are often collected by the lender into an escrow account.

Question 4

What costs are included in the Annual Percentage Rate (APR)?

Accepted Answer

The APR represents the true annual cost of borrowing. It includes the note interest rate plus certain required fees expressed as a percentage, such as origination fees, discount points, and private mortgage insurance premiums. It is always higher than the note interest rate and is a standardized tool used for comparing loan products.

Question 5

How much are closing costs, and who typically pays them?

Accepted Answer

Closing costs typically range from 2% to 5% of the loan amount. They cover third-party services like appraisal, title insurance, attorney fees, and origination fees. While the buyer traditionally pays, sellers can often contribute via seller concessions (up to a limit set by the loan type).

Question 6

What is the role of an Escrow Account?

Accepted Answer

An Escrow Account (sometimes called an Impound Account) is a separate account managed by your loan servicer to hold the funds collected for your property taxes and homeowner's insurance. The servicer pays these bills on your behalf when they become due.

Question 7

What is a Fixed-Rate Mortgage (FRM)?

Accepted Answer

An FRM is a loan where the interest rate remains constant for the entire repayment period (e.g., 15-year or 30-year fixed). This provides predictable monthly payments and stability.

Question 8

What is a Deed of Trust?

Accepted Answer

A Deed of Trust is a security instrument used in some states instead of a traditional mortgage. It involves three parties: the borrower (Trustor), the lender (Beneficiary), and a neutral third party (Trustee) who holds the title until the loan is paid off.

Question 9

What is the purpose of a Purchase Agreement and what are Contingencies?

Accepted Answer

The Purchase Agreement is the binding contract between the buyer and seller detailing the terms of sale. Contingencies are clauses that must be met for the contract to close, commonly including the Financing Contingency (loan approval) and the Inspection Contingency (satisfactory property inspection).

Question 10

What is Earnest Money and what happens to it at closing?

Accepted Answer

Earnest Money (or a 'good faith deposit') is a sum the buyer pays to show commitment to the sale. It is typically held in an escrow account and is applied toward the buyer's down payment or closing costs at the time of settlement. If the buyer backs out without a valid contingency, they may forfeit this money.

Question 11

How exactly does the lender calculate my Debt-to-Income (DTI) Ratio?

Accepted Answer

DTI is calculated by dividing your total minimum monthly debt payments (including the proposed new PITI) by your gross monthly income. Most conventional and QM (Qualified Mortgage) programs cap the DTI at 43%, though exceptions exist for certain high-credit or automated underwriting approvals.

Question 12

Will a recent increase in my income qualify me for a higher loan amount?

Accepted Answer

Generally, lenders require a two-year history of stable income for it to be counted fully. Recent increases are acceptable if documented and likely to continue, but new employment or significant shifts may require additional documentation (e.g., W-2s, tax returns).

Question 13

What is the significance of the Annual Percentage Rate (APR)?

Accepted Answer

The APR is the standardized calculation of the total cost of credit over the life of the loan. It is typically higher than the note interest rate because it includes prepaid interest, discount points, and mortgage insurance. It is the best metric for comparing different loan offers.

Question 14

How long after a bankruptcy or foreclosure can I qualify for a new mortgage?

Accepted Answer

Waiting periods vary significantly: FHA requires 2 years for Chapter 13 dismissal/discharge, 2 years for Chapter 7 discharge, and 3 years after foreclosure. Conventional generally requires 4 years after Chapter 7 discharge and 7 years after foreclosure (or 2-4 years with extenuating circumstances).

Question 15

What assets are accepted as proof of funds for closing and reserves?

Accepted Answer

Lenders accept liquid assets, including checking/savings accounts, retirement accounts (with limitations), stocks, bonds, and mutual funds. All funds must be seasoned (in the account for 60+ days) or have a clear paper trail (source) if newly deposited.

Question 16

What is a Credit Score (FICO), and what factors affect it most?

Accepted Answer

Your FICO score is a numerical representation of your credit risk. The main factors are: Payment History (35%), Amounts Owed (30%), Length of Credit History (15%), New Credit (10%), and Credit Mix (10%). Keeping balances low and paying on time are the biggest factors.

Question 17

Can I use gift funds for a down payment?

Accepted Answer

Yes, gift funds are allowed on most loan types (Conventional, FHA, VA), provided the donor is a relative and a formal gift letter is signed. FHA allows 100% of the down payment to be gifted, while Conventional rules can be more restrictive depending on the LTV.

Question 18

How does Self-Employed Income differ from W-2 income for qualification?

Accepted Answer

Self-employed borrowers must typically provide two years of tax returns (personal and business). Lenders calculate qualifying income using the net profit (after deductions), which is often lower than the gross income, meaning meticulous documentation is key.

Question 19

What is the difference between a Credit Report and a Credit Score?

Accepted Answer

The Credit Report is the detailed history of your borrowing and repayment activity. The Credit Score (like FICO) is the numerical summary derived from that report, used by lenders to quickly assess risk.

Question 20

What is a Conforming Loan?

Accepted Answer

A conforming loan is a mortgage that meets the size and guideline limits set by Fannie Mae (FNMA) and Freddie Mac (FHLMC). These are the most common and often offer the lowest rates because they can be sold easily on the secondary market.

Question 21

What is a Jumbo Loan?

Accepted Answer

A Jumbo Loan is a non-conforming loan that exceeds the loan limits set by Fannie Mae and Freddie Mac for a given area. They typically require higher credit scores, larger down payments, and more stringent reserve requirements.

Question 22

What is an Adjustable-Rate Mortgage (ARM), and how does it adjust?

Accepted Answer

An ARM (e.g., 5/1, 7/1) has a fixed rate for an initial period (5 or 7 years). After that, the rate adjusts annually based on a public Index (like SOFR) plus a fixed Margin (set by the lender). Adjustments are restricted by Rate Caps (periodic and lifetime limits).

Question 23

What are the major benefits of a VA Loan?

Accepted Answer

VA Loans, guaranteed by the Department of Veterans Affairs, offer 0% down payment, no monthly mortgage insurance (PMI), and highly competitive interest rates for eligible veterans, active service members, and surviving spouses. They require a mandatory Funding Fee.

Question 24

When is Private Mortgage Insurance (PMI) required, and how is it removed?

Accepted Answer

PMI is required on Conventional loans when the Loan-to-Value (LTV) ratio is greater than 80% (i.e., less than 20% down). It can typically be removed when the LTV reaches 80% based on the original value or 78% automatically per the Homeowners Protection Act (HPA).

Question 25

What is a Reverse Mortgage?

Accepted Answer

A Reverse Mortgage (most commonly an FHA HECM) is available to homeowners aged 62 or older, allowing them to convert home equity into cash. Repayment is deferred until the last borrower passes away, sells the home, or moves out.

Question 26

What is a Portfolio Loan?

Accepted Answer

A Portfolio Loan is one that the originating lender intends to keep on its own balance sheet ('in portfolio') rather than selling it on the secondary market. These loans often have flexible guidelines and are used for unique properties or borrower situations that don't fit standard conforming rules.

Question 27

What is a Construction Loan?

Accepted Answer

A short-term, interim loan used to finance the construction of a home. Funds are disbursed in 'draws' as construction milestones are met. It is typically replaced by a permanent mortgage (a 'take-out' loan) once construction is complete.

Question 28

What is a Non-Qualified Mortgage (Non-QM) and when is it used?

Accepted Answer

A Non-QM is a loan that does not meet the strict underwriting guidelines of a Qualified Mortgage (QM). It is used for specialized situations, such as bank statement loans for self-employed borrowers, or loans for investors with a high number of properties. They often carry higher rates and fees.

Question 29

What is the difference between an FHA loan and a Conventional loan?

Accepted Answer

FHA loans are government-insured, require less strict credit scores, and have a smaller down payment (3.5%), but require Mortgage Insurance Premium (MIP) for the life of the loan. Conventional loans require higher scores and offer optional PMI removal but start at 3% down.

Question 30

What is the Loan Estimate (LE), and when do I receive it?

Accepted Answer

The LE is a standardized three-page document summarizing the estimated loan terms, projected payments, and closing costs. Lenders are required to provide the LE to you within three business days of receiving your formal application.

Question 31

What is Underwriting, and what is the underwriter looking for?

Accepted Answer

Underwriting is the critical evaluation process where the lender assesses risk. The underwriter reviews the 'Three C's': Credit (score and history), Capacity (DTI and income), and Collateral (property appraisal) to determine if the loan is safe to approve.

Question 32

What is a Rate Lock, and how long does it last?

Accepted Answer

A Rate Lock is a lender's guarantee to hold a specific interest rate and related points for a defined period (e.g., 30, 45, or 60 days). Locking the rate protects you if market rates rise during the closing process.

Question 33

What is the importance of the Appraisal in the loan process?

Accepted Answer

The appraisal provides an independent, professional opinion of the property's market value based on comparable sales (comps). The loan amount is based on the lesser of the purchase price or the appraised value. If the appraisal is low, it can jeopardize the loan.

Question 34

What is the Closing Disclosure (CD), and why is the three-day rule critical?

Accepted Answer

The CD is the final five-page document detailing the actual loan terms and all closing costs. It must be provided to the borrower at least three business days before the scheduled closing date, allowing time for review and comparison with the initial Loan Estimate.

Question 35

What is Clear to Close (CTC)?

Accepted Answer

CTC is the formal notification from the lender that all underwriting conditions have been met, the loan is fully approved, and all necessary documents have been submitted to the title company or attorney to schedule the final settlement meeting.

Question 36

Who attends the closing (settlement) meeting?

Accepted Answer

Key attendees typically include the buyer(s), the seller(s), the title agent/closing attorney, and often the real estate agents. The loan officer may attend or be available remotely. The final documents, including the Note and Mortgage/Deed of Trust, are signed at this meeting.

Question 37

What are the roles of the Title Company and the Closing Attorney?

Accepted Answer

The Title Company researches the property's history to ensure a clear title and issues title insurance. The Closing Attorney (required in some states) conducts the settlement meeting, oversees the legal paperwork, and ensures the deed and mortgage are recorded properly.

Question 38

What is the difference between a Wet Settlement and a Dry Settlement?

Accepted Answer

In a Wet Settlement (common in Florida), funds are disbursed immediately after all documents are signed. In a Dry Settlement (common in escrow states like California), documents are signed but funds are disbursed only after a final review period (often days later) and all conditions are met.

Question 39

What are Discount Points and when should I buy them?

Accepted Answer

A discount point is a pre-paid fee equal to 1% of the loan amount, paid at closing to permanently reduce the mortgage interest rate. This is called 'buying down the rate.' It's typically worthwhile if you plan to keep the loan for many years (as the savings eventually exceed the upfront cost).

Question 40

What are Lender Credits?

Accepted Answer

Lender Credits are funds provided by the lender to cover some or all of your closing costs. The trade-off is that you accept a slightly higher interest rate for the life of the loan. This is ideal if you have minimal cash for closing costs and plan to refinance or sell in the near future.

Question 41

What is Per Diem Interest?

Accepted Answer

Per Diem (meaning 'per day') interest is charged at closing to cover the interest accrued from the closing date until the end of the month. Since the first mortgage payment covers the next month's interest, this fee ensures all interest is accounted for.

Question 42

What is an Acceleration Clause?

Accepted Answer

An Acceleration Clause is a provision in the mortgage or deed of trust that allows the lender to demand immediate full repayment of the entire outstanding principal balance if the borrower defaults on the loan terms (most commonly, missing payments).

Question 43

What is the Total Interest Percentage (TIP)?

Accepted Answer

The TIP is a disclosure required by TILA (Truth in Lending Act) that states the total amount of interest you will pay over the entire term of the loan, expressed as a percentage of the loan amount. It highlights the true long-term cost of borrowing.

Question 44

Is a Prepayment Penalty (PPP) common, and how do I avoid it?

Accepted Answer

Prepayment penalties (PPP) (a fee for paying off the loan early) are rare on standard residential mortgages but can be found in some specialized non-QM or portfolio loans. Federal law strictly limits them. Always review the Loan Estimate and Note to ensure this clause is not present.

Question 45

What is Negative Amortization?

Accepted Answer

Negative amortization occurs when your monthly payment is less than the interest that is due. The unpaid interest is added to the principal balance, causing your total loan amount to actually increase over time. This is a very risky feature found only in certain complex, non-Qualified Mortgages.

Question 46

How does HSA (Homeowners Association) assessment impact my mortgage?

Accepted Answer

A special HOA assessment (a large, one-time fee) can impact your mortgage by raising your total debt obligation. If the assessment is significant, the lender may require it to be paid off before closing. If it results in a monthly increase, it will factor into your DTI calculation.

Question 47

What is Hazard Insurance versus Title Insurance?

Accepted Answer

Hazard Insurance (Homeowners Insurance) protects the home structure against physical damage (fire, storm, theft). Title Insurance protects the owner and the lender against financial loss from defects in the property's legal title.

Question 48

When is the best time to Refinance?

Accepted Answer

The best time to Refinance is when the savings on your new monthly interest payments will offset the cost of the refinance (closing costs) quickly. A common rule of thumb is when rates have dropped by at least 0.75% to 1.0% below your current rate, or if you need to switch from an ARM to a fixed rate.

Question 49

What is a Cash-Out Refinance?

Accepted Answer

A cash-out refinance involves taking out a new loan for a greater amount than your existing mortgage balance. The difference is given to you as tax-free cash at closing. This is a common way to fund home improvements, pay off high-interest debt, or access liquid funds.

Question 50

What is a Home Equity Line of Credit (HELOC)?

Accepted Answer

A HELOC is a revolving line of credit secured by your home's equity. It functions like a credit card: you only borrow funds as needed, you only pay interest on the amount used, and you can repay and reuse the funds during the pre-defined draw period.

Question 51

What is Subordination in a refinance context?

Accepted Answer

If you have a second mortgage (like a HELOC), when you refinance your first mortgage, the HELOC must sign a Subordination Agreement to formally agree to remain in the second lien position. This is a common closing requirement.

Question 52

How is Equity calculated, and how much can I access?

Accepted Answer

Equity is calculated as the home's current market value (from the appraisal) minus your total outstanding debt (liens). Most cash-out refinances limit the borrower to extracting funds up to 80% LTV (Loan-to-Value), though some programs allow up to 90%.

Question 53

What is the Right of Rescission for refinancing?

Accepted Answer

The Right of Rescission is a federal protection under the Truth in Lending Act (TILA) that grants borrowers three business days after closing a refinance on a primary residence to cancel the loan without penalty. This right does not apply to a purchase mortgage.

Question 54

What is a Streamline Refinance and who is it for?

Accepted Answer

A Streamline Refinance is a product (common with FHA and VA loans) that allows current borrowers to refinance with minimal documentation (no appraisal, no income verification) to get a lower rate. The main requirement is that the new loan must provide a 'net tangible benefit' to the borrower.

Question 55

What is a 1031 Exchange?

Accepted Answer

A 1031 Exchange (or 'like-kind exchange') is a tax-deferred transaction allowing a real estate investor to defer capital gains taxes on the sale of an investment property by reinvesting the proceeds into a new, similar investment property within specific timelines set by the IRS.

Question 56

What are the underwriting differences for an Investment Property versus a Primary Residence?

Accepted Answer

Investment properties are considered higher risk. Lenders typically require larger down payments (20% to 30%), higher credit scores, lower DTI limits, and require the borrower to have more cash reserves (often 6 months of PITI for all financed properties).

Question 57

What is the difference between Joint Tenancy and Tenancy in Common?

Accepted Answer

Joint Tenancy includes the Right of Survivorship, meaning the property automatically passes to the surviving owners upon death. Tenancy in Common (TIC) does not include survivorship; the deceased owner's share passes to their heirs.

Question 58

What is the Mortgage Backed Security (MBS) market?

Accepted Answer

The MBS market is the secondary market where mortgage loans are packaged together and sold as investment securities. Fannie Mae, Freddie Mac, and Ginnie Mae are the primary players who buy loans from originators, providing capital for the housing market.

Question 59

What is a Land Contract or Contract for Deed?

Accepted Answer

A contract where the buyer makes payments directly to the seller over a period of time, but the legal title (deed) to the property remains with the seller until the full purchase price is paid. This is a form of seller financing used when the buyer cannot obtain a conventional mortgage.

Question 60

What is Title Insurance, and should the owner buy a policy?

Accepted Answer

Title insurance protects against financial loss due to defects in the title (e.g., forgery, undisclosed liens, errors in public records). The lender requires a Lender's Policy. It is highly recommended that the buyer purchase an Owner's Policy to protect their equity investment.

Question 61

How are Property Taxes and HOA Fees handled at closing?

Accepted Answer

Property taxes and HOA fees are subject to proration. The tax or fee is calculated on a daily basis, and the buyer and seller split the cost according to the number of days each owned the property within the current tax/fee period.

Question 62

What does Non-Recourse mean in a real estate loan?

Accepted Answer

A non-recourse loan is one where the lender's claim against the borrower in case of default is limited strictly to the collateral (the property). They cannot pursue the borrower's personal assets beyond that. This is more common in commercial real estate.

Question 63

What is Real Estate Owned (REO)?

Accepted Answer

REO stands for Real Estate Owned and refers to property owned by a bank or lender after an unsuccessful foreclosure auction. Buying an REO property can mean a simpler closing process than a traditional sale, as you are dealing directly with the owner/lender.

Question 64

What are the rules under TILA (Truth in Lending Act)?

Accepted Answer

TILA is designed to protect consumers by requiring lenders to clearly disclose the terms and costs of credit, particularly the APR. Key regulations include the Right of Rescission and rules governing advertising of interest rates and payment terms.

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