What are the common steps in the loan process? Answer


How do I know how much house I can afford? Answer


What is the difference between a fixed-rate loan and an adjustable-rate loan? Answer


How is an index and margin used in an ARM? Answer


How do I know which type of mortgage is best for me? Answer


What does my mortgage payment include? Answer


How much cash will I need to purchase a home? Answer


What is an FHA Loan? Answer


What is "PMI"? Answer


What is a "piggyback" mortgage? Answer


What is "closing", and what do I need to bring to it? Answer


What is "escrow", and do I need it? Answer


What if I don't have enough established credit? Answer


What if I have credit problems in the past or have filed bankruptcy? Answer


What if I've just taken a new job? Answer


What does "loan to value" mean? Answer


I'm overwhelmed by these terms! What do all of these new phrases I'm hearing mean? Answer

Q :

What are the common steps in the loan process?

A :

1. Prequalification
"Prequalification" occurs before the loan process actually begins, and is usually the first step after initial contact is made. In a prequalification, the lender gathers information about the income and debts of the borrower and makes a financial determination about how much house the borrower may be able to afford. Different loan programs may lead to different values, depending on whether you are qualified for them, we will help you look at all the variety of programs to meet your individual needs.

2. Application
The "application" is actually the beginning of the loan process and usually occurs between days one and five of the loan. The buyer, now referred to as a "borrower", completes a mortgage application with the loan officer and supplies all of the required documentation for processing. Various fees and down payments are discussed at this time and the borrower will receive a Good Faith Estimate (GFE) and a Truth-In-Lending statement (TIL) within three days which itemizes the rates and associated costs for obtaining the loan.

3. Opening The File
This occurs between days 3 and 10. At this time the lender orders a property appraisal (if the property address is known), property survey and credit reports, mails out requests for verifications, if necessary, for employment (VOE) and bank deposits (VOD) and any other documents needed for processing of the loan. All information supplied by the borrower is reviewed at this time and a list of items not yet received is compiled.

4. Processing
Processing occurs between days 5 and 25 of the loan. The "processor" reviews the credit reports and verifies the borrower's debts and payment histories as the VODs and VOEs are returned. If there are unacceptable late payments, collections for judgment, etc., a written explanation is required from the borrower. The processor also reviews the appraisal and survey and checks for property issues that may require further discernment. The processor's job is to put together an entire package that may be underwritten by the lender.

5. Underwriting
"Lender underwriting" occurs between days 15 and 25. The underwriter is responsible for determining whether the combined package passed over by the processor is deemed as an acceptable loan. If more information is needed, the loan is put into "suspense" and the borrower is contacted to supply more documentation.

"Mortgage insurance underwriting" occurs when the borrower has less than 20% of the loan amount to put towards a down payment. At this time, the loan is submitted to a private mortgage guaranty insurer, who provides extra insurance to the lender in case of default. As above, if more information is needed the loan goes into suspense.

6. Pre-Closing
"Pre-Closing" occurs between days 20 and 30. During this time the title insurance is ordered, all approval contingencies, if any, are met, and a closing time is scheduled for the loan.

7. Closing
Closing usually occurs between days 30 and 45 of the loan. At the closing, the lender "funds" the loan with a cashier's check, draft or wire to the selling party in exchange for the title to the property. This is the point at which the borrower finishes the loan process and actually buys the house. Closings occur at different places in different states. For instance, some states require that the closing take place at a closing attorney's office, while others use a title or escrow company.

Q :

How do I know how much house I can afford?

A :

Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend upon your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. You may also be able to take advantage of special loan programs for first time buyers to purchase a home with a higher value. Give us a call, and we can help you determine exactly how much you can afford.

Q :

What is the difference between a fixed-rate loan and an adjustable-rate loan?

A :

With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM loan will likely change. There are advantages and disadvantages to each type of mortgage, and the best way to select a loan product is by talking to us.

Q :

How is an index and margin used in an ARM?

A :

An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and a pre-specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London Interbank Offering Rate (LIBOR).

Q :

How do I know which type of mortgage is best for me?

A :

There is no simple formula to determine the type of mortgage that is best for you. This choice depends on a number of factors, including your current financial picture and how long you intend to keep your house. First Mortgage of Indiana, Inc. can help you evaluate your choices and help you make the most appropriate decision.

Q :

What does my mortgage payment include?

A :

For most homeowners, the monthly mortgage payments include three separate parts:

·  Principal: Repayment on the amount borrowed

·  Interest: Payment to the lender for the amount borrowed

·  Taxes & Insurance: Monthly payments are normally made into a special escrow account for items like hazard insurance and property taxes. This feature is sometimes optional, in which case the fees will be paid by you directly to the County Tax Assessor and property insurance company.

Q :

How much cash will I need to purchase a home?

A :

The amount of cash that is necessary depends on a number of items. Generally speaking, though, you will need to supply:

·  Earnest Money: The deposit that is supplied when you make an offer on the house

·  Down Payment: A percentage of the cost of the home that is due at settlement

·  Closing Costs: Costs associated with processing paperwork to purchase or refinance a house

Q :

What is an FHA Loan?

A :

Although many people think it is, an FHA mortgage is not a first-time home buyers program. Actually, it's a program that allows borrowers the ability to get into a home with less hassle than a conventional loan. The FHA does not give loans, it actually designates certain lenders the ability to lend money to buyers who qualify under their program guidelines. They insure against default. FHA's analysis of the transaction takes into consideration the applicant's income, past credit history, work history, and ability to save and manage financial affairs. Each applicant is considered individually as no two families have the exact same situation. Family obligations, responsibilities, future prospects, motivation and spending patterns all differ widely.

Advantages of FHA Loans:

  • Low down payment
  • Less cash from borrower than a conventional loan
  • Less stringent loan underwriting guidelines
  • fully assumable (with qualification)
  • No repayment penalty
  • 100% gift allowed
  • 6% seller contribution allowed

Eligibility Requirements

FHA financing is available to any qualified applicant, whether a U.S. citizen or not. However, the property must be the occupying borrower's principal residence. The borrower must also have a social security number. You can finance up to a 4 unit property with and FHA insured mortgage.

FHA Mortgage Insurance

Mortgage insurance is required on all FHA loans. The insurance is collected by the lender and paid to FHA, who in turn reimburses lenders in the event of loan defaults.

MIP (Mortgage Insurance Premium) is a one-time premium calculated as a percentage of the loan amount that applies to Single Family Residences (SFR) and Planned Unit Developments (PUD). This fee can be 100% financed and added to the base loan.

FHA Loan Programs And Amounts

The maximum FHA loan amount for Central Indiana is currently set at $165,300 for a one unit property. This amount is higher for 2-4 unit properties.

The two programs available are the 30 or 15 year fixed/level payment where the monthly principle and interest payment remains the same for the life of the loan or the one-year ARM (Adjustable Rate Mortgage) which can fluctuate based on the index (1-year Treasury Bill) and has a 1% annual cap and a 5% lifetime cap.

Interest Rates

FHA does not set interest rates. Rates reflect current market conditions. Discount points need not be paid by anyone, but discount points to obtain a lower than market rate can be paid by either the buyer or the seller.

FHA Appraisals

FHA uses the same appraisals for all programs. The appraisals (or Conditional Commitments) are done by FHA assigned/approved appraisers and set forth FHA's estimate of value. If the appraisal is at a value lower than requested, a reconsideration of value may be requested by sending FHA recent comparables indicating a higher value, or the buyer may pay the additional difference.


FHA allows a borrower to use a non-occupying co-signer for purposes of qualifying for the loan. The co-signer's income, assets, liabilities and credit history are included in the determination of credit worthiness. The co-signer must be a blood relative, or for unrelated individual, documented evidence of a family-type, long-standing and substantial relationship not arising out of the loan transaction

Buyer's Costs

  • Down Payment
  • Appraisal Fee
  • Credit Report Fee
  • Recording Fees
  • Property Tax Proration and Reserves
  • MIP (can be 100% financed and added to base loan)
  • Hazard Insurance and Reserves
  • Per Diem interest on new loan, based on closing date
  • 1% Transfer Tax

Seller's Costs

  • Tax Service Fee*
  • Proration of Property Taxes
  • Structural Pest Control Inspection and Repairs
  • Pay Off Existing Trust Deed and Liens
  • Broker fees
  • Buyers' Loan Processing Fee*
  • 1% Transfer Tax

And Don't Forget...

Down payment, closing costs and impounds required for closing must be paid from the buyer's own funds or can be a non-repayable gift from a relative. FHA does not allow the buyer to pay certain costs and therefore those costs must be paid by the seller (see * items under Seller Costs above). If any other costs, other than those FHA non-allowable costs, are paid by the seller on behalf of the buyer, FHA requires that the buyer's loan be reduced by a corresponding amount, saving the buyer very little money, because their down payment is increased.

Q :

What is "PMI"?

A :

PMI is a term used for Private Mortgage Insurance. PMI is required by lenders when there is less than 20% down or equity in a property. It's an insurance that protects the lender against default. PMI has nothing to do with life and disability insurance.

Q :

What is a "piggyback" mortgage?

A :

The piggyback mortgage program involves the use of two separate mortgages in a purchase or refinance transaction. The term "piggyback" refers to the second mortgage that closes simultaneously with the first mortgage loan. It is primarily used to eliminate Private Mortgage Insurance (PMI), but it may also lower your monthly mortgage payment.

Q :

What is "closing", and what do I need to bring to it?

A :

Closing is when a purchaser and a seller finalize the transaction. It normally takes place at either the attorneys' office or a title companies office. It's when you actually sign all the final paperwork for your mortgage and keys to the home are exchanged.

The standard items needed for your closing are picture ID, certified funds payable to the attorney or title company and your original homeowners insurance. Other items may be needed depending on the particular situation. You will get the final amount that is needed approximately 2 days prior to closing from the attorney or title company.

Q :

What is "escrow", and do I need it?

A :

An escrow is when you include your taxes and insurance with your monthly mortgage payment.

Escrow is not required with 20% down, or with a piggyback loan.

The disadvantage is, the lender is holding your money to pay your taxes and not paying you interest on it. The advantage is, instead of getting a tax bill and having to come up with the money yourself to pay it, you send it to your lender and they pay it out of your escrow account. They have been collecting the money from you every month.

Q :

What if I don't have enough established credit?

A :

If you do not have enough established credit, we can work with you to document alternate credit information. If you have been renting, we can obtain a rental rating from your landlord as a way of verifying your payment history. Or, we can contact your utility companies, phone service, cable companies or car insurance carrier to obtain a rating on your payment history. Not all loan programs will accept alternative documentation on your credit. There are both government and conventional programs that will accept this type of payment history to establish credit qualifications.

Q :

What if I have credit problems in the past or have filed bankruptcy?

A :

This is a situation that requires us to analyze the situation completely. We will require explanations for anything derogatory.

Q :

What if I've just taken a new job?

A :

A new job can work in your favor when you apply for your loan. Loan program guidelines look for a 2 year job history in the same field, but a job change for a better position is looked on favorably. If you are a recent college graduate, you may be able to obtain a loan even though you don't have a 2 year work history.

Q :

What does "loan to value" mean?

A :

Loan to value (LTV) is the loan amount divided by the lesser of the sales price or appraised value. For example, if you are paying 15% of the total cost of the home as a down payment, you would only be borrowing 85% of the total sales price from the lender. Therefore you LTV would be 85%.

Q :

I'm overwhelmed by these terms! What do all of these new phrases I'm hearing mean?

A :

Acceleration clause: A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.

Adjustable-rate mortgage (ARM): A mortgage whose interest rate changes over time based on an index and a margin. Rate changes are made at prescribed times and within prescribed limits (caps) as defined in the mortgage contract.

Amortization: The gradual repayment of a mortgage by installments.

Amortization schedule: A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance on the loan.

Annual percentage rate (APR): The total yearly cost of a mortgage stated as a percentage of the loan amount. This includes the base interest rate, mortgage insurance, origination fees, and some other related fees. See your lender for a more complete explanation of what fees are used to calculate your APR.

Appraisal: A professional opinion of the market value of a property.

Appreciation: An increase in the value of a house due to changes in market conditions or other causes.

Assessed value: The valuation placed upon a property by a public tax assessor for purposes of taxation.

Assumable mortgage: A mortgage that can be taken over ("assumed") by the buyer when a home is sold.

Assumption: The transfer of the seller's existing mortgage to the buyer.

Binder: A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate.

Cap: A provision of an ARM limiting how much the interest rate or mortgage payments may increase.

Cash reserve: A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two mortgage payments.

Clear title: A title that is free of liens and legal questions as to ownership of the property.

Closing: The occasion where a sale is finalized; the buyer signs the mortgage, and closing costs are paid. Also called "settlement".

Closing costs: Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called "settlement costs".

Commitment letter: A formal offer by a lender stating the terms under which it agrees to loan money to a home buyer.

Community Home Buyer's Program: An alternative financing option that allows households of modest means to qualify for mortgages using nontraditional credit histories, 33 percent housing-to-income and 38 percent debt-to-income ratios, and the waiver of the usual two payments cash reserves at closing.

Condominium: A form of property ownership in which the homeowner holds title to an individual dwelling unity plus an interest in common areas of a multi-unit project.

Contingency: A condition that must be met before a contract is legally binding.

Conventional mortgage: Any mortgage that is not insured or guaranteed by the federal government.

Convertible ARM: An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.

Cooperative: A form of common property ownership in which the residents of an apartment building do not own their own units, but rather own shares in the corporation that owns the property.

Covenant: A clause in a mortgage that obligates or restricts the borrower and which, if violated, can result in foreclosure.

Credit report: A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.

Deed: The legal document conveying title to a property.

Deed of trust: The document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower.

Default: Failure to make mortgage payments on a timely basis or to comply with other conditions of a mortgage.

Delinquency: A loan in which a payment is overdue but not yet in default.

Deposit: Cash paid to the seller when a formal sales contract is signed.

Depreciation: A decline in the value of a property; the opposite of "appreciation".

Discount points: See "Points".

Down payment: The part of the purchase price which the buyer pays in cash and does not finance with a mortgage.

Due-on-sale clause: A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.

Earnest money: A deposit given to the seller to show that a prospective buyer is serious about buying the house.

Easement: A right of way giving persons other than the owner access to or over a property. A common example is a utility easement, which gives the power company the right to put power lines and poles over properties to deliver electricity.

Equal Credit Opportunity Act (ECOA): A federal law that prohibits lenders from denying mortgages on the basis of the borrower's race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity: The difference between the market value of a property and the homeowner's outstanding mortgage balance. If your home is worth $100,000 and you owe $65,000, you are said to have 35% equity in your home.

Equity loan: A loan based on the borrower's equity in his or her home.

Escrow: The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender into which a homeowner pays money for taxes and insurance.

Fair Credit Reporting Act: A consumer protection law that sets up a procedure for correcting mistakes on one's credit record.

FHA loan: A mortgage insured by the Federal Housing Administration. See the FHA Loan for more details.

First mortgage: The mortgage that has first claim (or "lien") in the event of a default.

Fixed-rate mortgage: A mortgage in which the interest rate does not change during the entire term of the loan.

Flood insurance: Insurance required for properties in federally designated flood areas.

Forbearance: The lender's postponement of foreclosure to give the borrower time to catch up on overdue payments.

Foreclosure: The process by which a mortgaged property may be sold when a mortgage is in default.

Graduated payment mortgage (GPM): A mortgage that starts with low monthly payments that increase at a predetermined rate. Be aware that most GPM's include a negative amortization clause.

Hazard insurance: Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism and other hazards.

Homeowner's insurance: An insurance policy that combines liability coverage and hazard insurance.

Homeowner's warranty: A type of insurance that covers repairs to specified parts of a house for a specific period of time.

Interest: The fee, or rent, charged by the lender for borrowing money.

Interest rate cap: A provision of an ARM limiting how much interest rates my increase in a given adjustment period. See also "Lifetime cap".

Joint tenancy: A form of co-ownership giving each tenant equal interest and equal rights in the property, including the right of survivorship.

Late charge: The penalty a borrower must pay when a payment is made after the due date.

Lease-Purchase Mortgage Loan: An alternative financing option that allows low- and moderate-income home buyers to lease a home from a nonprofit organization with an option to buy, and with each month's rent payments consisting of "PITI" payments on the first mortgage, plus an extra amount that is earmarked for a savings account in which money for a down payment accumulates.

Lien: A legal claim against a property that must be paid when the property is sold.

Lifetime cap: A provision of an ARM that limits the total increase in interest rates over the life of the loan.

Loan commitment: See "Commitment letter".

Loan Servicing: The collection of mortgage payments from borrowers and the related responsibilities of a loan officer, such as foreclosure, tax and insurance escrow, etc.

Loan-to-value ratio (LTV): The total loan amount divided by the value of the house.

Lock-in: A written agreement guaranteeing the home buyer a specified interest rate provided the loan closes with that buyer within a set period of time. The lock-in also usually specifies the number of points to be paid at closing as well.

Margin: The set percentage the lender adds to the index rate to determine the current interest rate of an ARM.

Mortgage: A legal document that pledges a property to the lender as security for payment of a debt, usually a loan on the house itself.

Mortgage banker: A company that originates mortgages exclusively for resale in the secondary market (such as to GNMA, FNMA and FHMLC).

Mortgage broker: A company that for a fee matches borrowers with lenders.

Mortgage insurance: See "Private Mortgage Insurance".

Mortgage insurance premium (MIP): the fee paid by a borrower to FHA or a private insurer for mortgage insurance.

Mortgage note: A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the agreement is secured by a mortgage.

Mortgagee: The lender in a mortgage agreement.

Mortgagor: The borrower in a mortgage agreement.

Negative amortization: Payment terms under which the borrower's monthly payments do not cover the interest due; as a result, the balance due is added to the loan balance making it rise - thus "negative amortization".

Notice of default: A formal written notice to a borrower that a default has occurred and that legal action may be taken.

Origination fee: A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount (1% is generally known as one point).

Owner financing: A purchase in which the seller provides all or part of the financing.

Payment cap: A provision of some ARMs limiting how much a borrower's payments may increase regardless of how much the interest rate increases; be aware that on some ARMs this may lead to "negative amortization".

PITI: Stands for principal, interest, taxes and insurance -- the components of a monthly mortgage payment.

Points: A one-time charge by the lender to increase or decrease the stated interest rate on a loan. To decrease the interest rate, the borrower "pays" points, to increase the interest rate, the borrower "receives" points. All interest rate/point combinations are virtual financial equivalents.

Prepayment penalty: A fee charged to a borrower who pays off a loan before it is due. Some loan programs contain a prepayment penalty, others do not - check with your loan officer for details.

Prequalification: The process of determining how much money a prospective home buyer will be eligible to borrow before a loan is applied for.

Principal: The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

Private mortgage insurance (PMI): Insurance provided by a nongovernmental insurer that protects lenders against a loss if a borrower defaults. Usually required on all loans with an "LTV" of more than 80%.

Purchase and sale agreement: A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Qualifying ratios: Guidelines applied by lenders to determining how large a loan to grant the home buyer. The debt-to-income ratio is your current monthly debt on loans and credit cards divided by your gross income. The housing-to-income ratio is your new housing payments divided by your gross income.

Radon: A radioactive gas found in some homes that in sufficient concentrations can cause health problems. Your lender may require a radon check on your home.

Rate lock: See "Lock-in".

Real estate agent: A person licensed to negotiate and transact the sale of real estate on behalf of either the borrower or seller, or in some cases both partied.

Real Estate Settlement Procedures Act: A consumer protection law that requires lenders to give borrowers advance notice of closing costs, including an "APR".

Refinancing: The process of paying off one loan with the proceeds from a new loan secured by the same property. This is most often done to get the better interest rates offered by the new loan.

Rent with option to buy: See "Lease-Purchase Mortgage Loans".

Second Mortgage: A mortgage that has rights that are subordinate to the rights of the first mortgage. As such, these loans are often less secure and may demand a slightly higher interest rate.

Secondary mortgage market: The buying and selling of existing mortgages.

Seller take-back: An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

Settlement: See "Closing".

Settlement Sheet: The computation of costs payable at closing which determines the seller's net proceeds and the buyer's net payment.

Survey: A drawing showing the legal boundaries of a property, it's fixtures, and any easements or encroachments.

Tenancy by entirety: A type of joint ownership of a property available only to a husband and wife.

Tenancy in common: A type of joint ownership in a property without right of survivorship.

(3/2) Options: An alternative financing plan that enables households whose earnings are no more than 115 percent of the medium income in their regional area to make a 3 percent down payment with their own funds, coupled with a 2 percent gift from a relative or a 2 percent grant or unsecured loan from a nonprofit or state or local government program.

Title: A legal document establishing the right of ownership.

Title company: A company that specializes in title searches and insuring title to property.

Title insurance: Insurance to protect the lender (lender's policy) or the buyer (buyer's policy) against loss arising from disputes over ownership of a property.

Title search: A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Transfer tax: State or local tax payable when title passes from one owner to another.

Truth-In-Lending: A federal law that requires lenders to full disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

Underwriting: The process of evaluating a loan application to determine the risk involved for the lender.

VA loan: A loan that is guaranteed by the Veterans Administration. Be sure to view VA loan for more information.