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Frequently Asked Questions (FAQs)
What is an Annual Percentage Rate (APR)?
An abbreviation for annual percentage rate, APR is how much your loan will cost over the course of a year. This figure is usually higher than the interest rate because it takes into account the interest charged as well as any fees or additional costs. Since all lenders use the same formula, it is a fair way to compare the cost of a mortgage rather than just the interest rate.
What is a credit score?
A credit score is a number that represents a borrower’s creditworthiness. Typically, a three-digit number from 300 to 850, it is a product of a mathematical model that evaluates a borrower’s credit report information and, based on the analysis of millions of credit transactions used to build the model, produces the score.
How is a credit score used?
Some landlords use credit scores when vetting prospective tenants. Property and casualty companies use them in underwriting insurance applicants. Mortgage lenders, insurers, and investors use them to determine whether they are willing to make, insure, or purchase mortgage loans and at what price.
Is there more than one credit score?
Yes. Three companies serve as the main repositories of borrower credit data. Several credit score vendors use this data. There are also many companies that sell reports containing credit data and scores, sourced from the repositories and score vendors. Each credit score vendor has a different approach, and some have several models designed for a specific purpose, such as auto lending or mortgage lending. In addition, there are multiple versions of scores available as credit score providers work to improve the predictive power of their scores. In the case of mortgage lending, each borrower’s credit report comes with three credit scores, one from each of the three repositories.
Is one score better than another?
It depends on what you are trying to accomplish. If your goal is to use the score with the greatest predictive power for a particular type of financial forecasting, you may choose a score different from the one you would use in the origination of a mortgage loan. In the case of mortgage lending, most lenders use the same version from the same credit score provider largely because it has been the de facto standard for many years. That is not to say that some mortgage lenders aren’t using other versions of that score or scores from other providers.
Why does a score for monitoring purposes often differ from the score a lender obtains during an application process?
There are several reasons scores may differ. First, credit report information is dynamic. Creditors regularly submit updated information to credit repositories. Because credit scores are derived from the dynamic data in the credit repositories, credit scores can change regularly. Second, there are multiple credit score providers, each with different scoring models. Third, each credit score provider has multiple versions of its score in the market at any given time. Finally, not all creditors report to credit repositories. Those that do may not be reporting accurately or in a timely manner (although that has improved significantly over the years).
What are closing costs / settlement fees?
Closing, or settlement fees, include but are not limited to loan origination fees, appraisal fees, title searches, title insurance, surveys, taxes, recording fees, and credit report charges. These fees are paid in addition to the price of the property by the buyers and sellers to complete a real estate transaction.
What is an escrow account?
Escrow accounts are usually required by lenders to cover property taxes, homeowner’s insurance, flood insurance, and mortgage insurance. After an initial deposit, borrowers make monthly escrow payments as part of their mortgage payment.
What is a Loan Estimate (LE)?
A loan estimate is an accurate estimation of fees associated with a loan provided to the customer by a mortgage lender or broker. The estimate must be provided within three business days of applying for a loan.
What are points?
Borrowers can pay lender points to reduce the interest rate on the loan, resulting in a lower monthly payment. The cost of one point is equal to one percent of the loan amount. Depending on the borrower, each point can lower your interest rate by one-eighth to one-quarter of one percent.
What does it mean to lock your interest rate?
Until you have locked in the interest rate with your lender, the rate on your loan can change. Typical rate locks are good for up to 90 days but can be longer depending on your type of loan. Speak with our experienced mortgage banker to help guide you.
What is the requirement when I am getting gift funds to close?
The receipt of gift funds is a great way to help with the costs of purchasing a home. However, there are certain documentation requirements when utilizing this method to help with your down payment and closing costs. Speak with your mortgage banker to learn the details.
Glossary
Initial interest rate
The beginning interest rate on an ARM.
Adjustment period
The length of time the interest rate on an ARM is scheduled to remain unchanged. The rate is reset at the end of this period and the monthly loan payment is recalculated.
Index rate
Most lenders tie ARM interest rate changes to changes in the index rate. Lenders base ARM rates on a variety of indices, the most common being rates on one, three, or five-year Treasury securities.
Margin
The percentage points that lenders add to the index rate to determine the ARM’s interest rate.
Interest rate caps
The limits on how much the interest rate or the monthly payment can be changed at the end of each adjustment period or over the life of the loan.
Initial discounts – (Sometimes known as ‘Teaser Rates’)
Sometimes used as a promotional aid, an initial discount offers a lower interest rate the first year of the loan. The interest rate would increase the following year.
Negative amortization
This means the mortgage balance is increasing. This occurs whenever the monthly mortgage payments are not large enough to pay all the interest due on the mortgage. This may be caused when the payment cap contained in the ARM is so low the principal plus interest payment is greater than the payment cap.
Conversion
The agreement with the lender may have a clause that allows the buyer to convert the ARM to a fixed-rate mortgage at designated times.