Mortgage FAQs
The world's biggest source for all of your mortgage-related questions. And for all things credit, including scores, reports, and repair, check out our Credit FAQs.
Durnford Team
A mortgage broker, such as Durnford Team, will work directly with you, the borrower, to complete all necessary actions needed to begin a loan including:
1) Reviewing your loan needs and choosing the most appropriate loan program for you
2) Taking your application
3) Processing the loan and submitting to the lender for underwriting
4) Ordering all third-party servicing including title and appraisal
5) Managing the loan through to closing.
The lenders that brokers work with are called wholesale lenders, which provide low rates and streamlined loan underwriting and closing. Retail lenders (incl banks, credit unions) originate and fund the loans "in-house". These retail lenders are typically generalists - doing a wide range of loans including mortgages - and that lack of specialization makes them slow and "document-heavy". Wholesale lenders are very competitive and highly efficient at processing loans (some lenders can close in just over 2 weeks - unheard of in retail banking) and that competitiveness in the wholesale market means you'll likely get a better rate with that faster close when you use a mortgage broker.
Loan Types
Conforming loans are mortgages that are within the financing restrictions set by the FHFA and fulfill the underwriting requirements provided by the two primary Federal agencies that acquire mortgages, Fannie Mae and Freddie Mac.
The loan limit is $647,200 for a 1-unit property (single family detached) up to $1,244,850 (4-unit). High for $510,400 but high-cost areas and 2-4 units have higher conforming loan limits. High-Cost (urban/suburban) Area Conventional loans range from a max mortgage of $970,800 (1-unit) to $1,867,275 (4-unit)
Non-Conforming loans do not "fit into the box" of the loan limits and underwriting guidelines of conforming mortgage loans. Jumbo, bank statement, asset depletion, rental income (DSCR), interest-only, and high debt-income loans are examples of loans that are non-conforming.
These are the 5 Types of Mortgage Loans:
1. Conventional Mortgages: Suitable for people with good credit score.
2. Jumbo Mortgages: Best for borrowers with great credit who want to purchase a high-priced home.
3. Government-insured Mortgages: Best for customers with poor credit and not much available for down payment.
4. Fixed-rate Mortgages: Best for borrowers who seek consistent payments over the term of the loan.
5. Adjustable -rate Mortgages: Best for borrowers who do not intend to stay in their house for a long period of time and are willing to accept the risk of higher monthly payments in the future.
We provide a variety of low-down payment alternatives, including conventional loans (those not guaranteed by a government agency) with down payments as low as 5%, FHA loans with as little as 3.5 percent down, and VA loans with low and no-down payment options for eligible veterans and other borrowers.
The most popular and underwritten loan type on the market today is conventional lending, which offers good rates, flexible down payment options, and flexible periods. Conforming, non-conforming (non-qm / for more flexible UW criteria), and jumbo mortgages are examples of conventional loans.
Mortgage Lingo
The originator is the individual (us) who helps structure and price your loan when you apply. The originator sends your application to the lender’s underwriting department. The lender is a financing company that underwrites, approves, funds and owns the loan. The mortgage servicer is the company (it can be the original lender or a 3rd-party servicer) that manages the loan.
MIP and PMI are 2 types of mortgage insurance. They add a premium to your monthly mortgage payment but allow you to borrow a larger percentage of your home's value. The type of mortgage insurance you have depends on the type of loan you have.
Lenders use one of two qualification ratios in their underwriting process. The first is the front-end / housing expense ratio (HTI) which is the percentage of your gross monthly income devoted to housing expenses. If you add up your primary home mortgage principal, interest, property tax, and insurance costs (or current primary rental costs) and divide by your gross income - that is your front-end ratio. The second ratio is called the back-end ratio or debt-income (DTI) ratio which is equal to your primary housing expenses + your monthly monthly debt (monthly payments for your other mortgages and installment loans plus minimum monthly payments for revolving debt (credit cards) - all divided by your gross income per month. The maximum DTI ratio varies by mortgage program but for most mortgages, 50% DTI ratio is the max ratio allowed for approval.
Cash or mortgage reserves are funds that have been documented (statements) as available to you after your loan closes. These funds insure your ability to make monthly mortgage payments, and different loan programs may have different cash reserve requirements and typically range from a couple months to 12 months payment reserves.
The interest rate is the annual cost of borrowing the principal amount of your loan. The APR is the annual cost of the loan —including fees. APR includes charges such as mortgage insurance, some closing costs, discount points and loan origination fees. It’s intended to give you more information about what you’re really paying and allow you to accurately compare different loans.
A full doc loan is a traditionally underwritten mortgage needing the proper income and asset documentation that fits underwriting guidelines. This would include loans needing such documents as W2s, 1099s, tax returns, paystubs, K1s, and SS award letters.
Alt-doc or alternative doc loans are non-conforming or non-QM loans that use other forms of income documentation, or are more flexible in their underwriting guidelines, than traditional full documentation loan. Alt-doc loans can use subject property income (DSCR), gross monthly deposits (Bank Statement), liquid and semi-liquid gross assets (Asset Utilization), and other forms of documenting your ability to repay the loan. If you can't fit in the box of a conforming loan, alt-doc loans are very flexible in their guidelines to qualify.
The loan estimate is a three-page form that presents your mortgage loan information in an easy-to-read format, complete with explanations. Check out the CFPB's excellent interactive Loan Estimate Explainer.
Similar to your initial Loan Estimate but now with all loan terms and costs finalized, you can use this form to prepare for close and compare to your initial Loan Estimate. Check out the CFPB's excellent interactive Closing Disclosure Explainer.
Mortgage Rates & Costs
Interest rates are influenced by the financial markets and can change daily – or multiple times within the same day. The changes are based on many different economic indicators in the financial markets.
Closing costs are the net of all costs incurred when getting a mortgage. Closing costs will vary by loan type, credit, property location, and other factors but will be discussed by the Durnford Team with you when we first quote your loan, and will be fully documented in your Initial Loan Estimate at the start of the process, and your Closing Disclosure days before closing. Closing costs can include:
- Origination and lender underwriting fees
- Title and escrow fees
- Government recording and transfer taxes (if applicable)
- Prepaid interest (for the month of close)
- Impounds (if tax and insurance is escrowed)
- Downpayment (if purchase)
Both refinances and cash-out refinances can pay fees outside of the loan (or in the case of a cash-out - just reduce the cash-out net proceeds) or, what is typical, the closing costs are "wrapped" (included) in the loan amount.
The origination charge is the amount charged for services performed on the initial loan application and loan processing. This includes all charges (other than discount points) that lenders and brokers involved in the transaction will receive for originating the loan. It includes any fees for application, processing, underwriting services, and payments from the lender for origination.
Mortgage points, almost knows as a discount fee, is a upfront loan fee paid to the lender in exchange for a reduced interest rate. Also known as "buying down your rate", this fee is typically expressed as a percent of the loan amount; e.g., "1 point" is a fee equal to 1% of the loan balance. Conversely, you can "float" your rate higher and you could end up with a lender credit at close. On refinances, the Discount Points/Fee can be wrapped into the loan amount.
We use technology to consider a wide range of factors — such as market conditions, your credit history, and your property characteristics — to find the best possible rates and options available to you from a variety of investors
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.. After you lock, we’ll hold your rate for you while we work together on the loan process. This gives you time to complete your application with peace of mind, knowing that your rate and monthly payment won’t change due to market movements.
You are free to withdraw your application and break your lock at any time. There is no fee for doing so. However, you won’t be able to lock a rate with us for the same property for 30 days.
We will extend your lock if it expires before your loan closes. If the loan delay was caused due to any complications on our end, we will waive the lock extension fee.
Absolutely. In fact, we provide a complete breakdown of the expected lender, title, escrow, and other costs involved to close your mortgage.
Yes, and no, it all depends on the loan program and the expected hold of the property. There are 2 ways I am compensated in this mortgage transaction: 1) borrower-paid compensation, whereby the borrower pays my fee in the transaction, or 2) lender-paid compensation whereby my fee is paid my the lender. The lender-paid compensation will be a higher rate since origination fees are included within the rate.
Here are the third-party fees typically associated with a mortgage transaction: lender fees, including origination fee paid to us (if borrower-paid compensation) and a lender underwriting/administration fee; appraisal fee (a home appraisal must be done to determine the value of the property unless waived by the lender; lender’s title insurance and other title fees; escrow/settlement fees, real estate transfer taxes (on purchase transactions); and recording fees (a fee charged by your city or county to officially record the sale).
Only non-conforming and commercial loans have pre-payment penalties and only if the loan is for an investment property. Conforming loans do not come with any prepayment penalties, and lenders can not charge prepayment penalties on any primary residence regardless of the loan type. And even for investment mortgages that do come with a prepayment clause, in most cases you can pay a fee or a higher rate to bring the penalty term down.
Mortgage Qualifying
Mortgage lenders are mostly looking for four things:
Credit: The better your credit score, the more loan possibilities you'll have and the better rate you'll get.
Equity: The LTV (Loan to Value ratio) is determined by the amount of money you have available for a downpayment (purchase) or equity (refinance and cash-out) . You'll get a better rate if your LTV is lower.
Income vs Debt (DTI) Ratio: It compares your monthly income before taxes to all of your fixed expenses, including your new mortgage. The total of all your credit report debt, including this new transaction, must not exceed half of your overall income on most loans.
Assets: Lenders want to make sure you have enough money for the downpayment (purchase) and loan fees. Lenders will also make sure you have enough money in the bank to cover a set number of months' worth of mortgage payments once the loan closes, depending on the loan type.
The "4 C's" of mortgage approval are as follows:
1. Capacity: Are you capable of repaying the debt? We'll need information about your employment, such as how long you've worked and how much you make, to ensure that you have sufficient income and job stability to support the payment.
2. Credit History: Will you be able to pay back the loan? We'll look at your credit history to see how much you owe, how frequently you borrow, if you pay your bills on time, and if you've ever lived within your means.
3. Capital: Do you have the funds to cover the down payment (if purchasing), closing charges, taxes, and insurance associated with your pending mortgage? Do you require a family gift? Will you have any money left over when you buy a house, or will you spend every penny?
4. Collateral: Will we be completely protected if you default on the loan? Depending on the loan type, the lender will lend up to a certain percentage of the property's value to ensure you have enough equity to back up the loan.
Most lenders want a two-year work history in the same sector, depending on the loan type and occupation, though changing employment for a better position / higher salary will be considered positive. Contact us and we'll look through your work history and current salary to see what you qualify for.
The Loan Process
The key to getting a quick loan is to provide the lender whatever they need when they ask for it. Here are some things you can do to speed up and simplify the process:
1. Before you make a purchasing offer, get pre-qualified or pre-approved for a financing. A pre-qualification helps you prevent hassles, embarrassment, and even financial loss if you go under contract without knowing your lending possibilities.
2.Get your documents ready ahead of time. In our mortgage program pages, we present the common documents required for each loan type.
3. Review your credit history and score for any issues. If you need assistance, go to Credit U.
4. Respond promptly to any requests from us, title, appraiser, or anyone else engaged in closing your loan while it is in process.
5. Please, no unexpected disclosures that cause the loan to be delayed or even denied by the lender. This involves being open and honest with us about your real estate holdings, finances, and goals so that we can choose the best loan product and lender for you. Lenders find out the majority of information during underwriting, whether it's provided or not, so let us do the legwork of turning your honest answers into a fantastic loan for the correct lender.
6. Also, no new credit or loans when applying for a mortgage. Lenders dislike credit and debt surprises right before closing, and they'll find out since they perform a soft pull prior to final approval. So, if you have plans to obtain additional credit that must be completed during the loan (vehicle replacement, for example), you must declare this as soon as possible so that the lender can account for it in the debt-income calculations.
When planning to buy a property and finance it with a mortgage, it's always a good idea to become PreQualified first to ensure that your expectations for securing a loan, as well as the rate, are in line with the lending programs available. Buying property is a time-consuming process for everyone involved, including your agent? So, as most agents encourage you to get PreQualified first before getting aggressive with your home search, reach out to us first and let's get things started!
Loans can close in as little as 2.5 weeks if we get required information and documentation quickly. The speed with which the appraisal report is generated will, in most situations, determine the speed with which the loan closes. So, in most circumstances, loans will close in 3-4 weeks - and even faster if it's a purchase loan with a tight deadline.
A Closing Disclosure is a document that contains the final details regarding the loan you're going to finalize. It contains the final loan terms, your expected monthly payments, and the amount you will pay in mortgage closing charges. The lender must provide you with the Closing Disclosure at least three working days before the loan closes. Before you get to the closing table, you have three days to evaluate your final terms and costs and ask your lender any questions you have.
Prepaid interest at closing refers to interest owed on your mortgage for the month you close. Your first payment will typically not be due until the following full month after the close. And, because your mortgage payment covers the interest for the previous month, you must also cover the interest for the month in which you close to be current. For example, if you close on July 28th, your first payment won't be until September 1st (which covers principal and interest for August), but you'll still owe interest for the few days of interest remaining in July, which is paid at closing.
The day after the closing and funding, in most cases. The close is divided into three parts: 1) the closure, when you sign the documents and they are returned to title; 2) funding, when the lender transfers the monies to title to close; and 3) title making disbursements to you and any payoffs that must occur with closing. You can expect wired funds in your account within 24 hours if title receives the funds soon after funding.
There are two reasons why lenders sell loans. The first is that it allows the lender to lend money to other lenders while also clearing their credit lines by selling the loan's servicing rights. The other reason is that the lender can sell it and potentially profit from the transaction.
When a mortgage firm sells your loan, they also sell the loan's servicing rights to another mortgage company. This is not a terrible thing for you unless you are delinquent or late on your payments, as you have previously agreed to the terms. It is also critical that the consumer is safeguarded during these transitions, safeguarding you from any potential damage during the loan sale.
Title & Escrow
The term "title" refers to a property's legal ownership rights. Title insurance protects you from "defects" in your home's title that could lead to a dispute over ownership. A lender's title policy is required, while an optional owner's policy insures the homeowner. Although an owner's policy is not needed by law, it is highly advised to ensure that you, as a homeowner, are protected from any potential legal difficulties not covered by the lender's policy.
You must obtain lender's title insurance when you refinance your mortgage to protect your lender for the new debt. For refinance and cash-out refinance transactions, many escrow/title businesses provide discounted rates. And, if you acquired owner's title insurance when you bought your house, this coverage will last as long as you or your heirs hold the house, so you won't have to buy it again.
The expense of doing a property title search and examination, mobile notary services, and recording are all covered by title fees. Title fees are shown on your Loan Estimate (LE) under "Services You Can Shop For" and on your Closing Disclosure under "Services Borrower Did Shop For."
Wiring money to a title firm is safe. Before conducting a wire transaction, make sure you read the instructions carefully and confirm your transfer with the title company. Remember that an automated clearing house (ACH) transfer is not an approved method of money transfer because it is not a direct wire transfer between banks. ACH transfers are made in bulk and can be altered, changed, or recalled without the account holder's permission. The actual account holder and bank will reject or return these as "bad monies." Wire transfers shield you from any problems that may arise when sending big amounts of money via ACH.
Appraisal
An appraisal is an unbiased professional opinion of the value of a home and is used whenever a mortgage is involved in the buying, refinancing, or selling of that property. In most cases an appraisal will be required for any mortgage loan. A qualified appraiser creates a report based on a visual inspection, using recent sales of similar properties, current market trends, and aspects of the home (e.g., amenities, floor plan, square footage) to determine the property’s appraisal value.
Yes. Almost all lenders and programs required an appraisal prior to closing. There are conforming loans that will allow appraisal waivers for qualified borrowers and some loan types will accept BPOs (broker price opinion), but in most cases a on-site appraisal inspection will need to be completed. If you purchase the property full cash is your decision only if you wish to order an appraisal although we suggest in most cases on any purchase, cash or not, that a property inspection occur to protect your interests.
An appraisal provides an estimate of value which in most cases will be required for a mortgage. A home inspection conducts a review on the structural, mechanical, electrical, and functional aspects of the property. While a home inspection is strongly recommended for property purchases, they are almost never required by lenders.
That depends. There are multiple items that can affect the appraisal price and the time it takes to generate the report. These items include:
- If the appraisal is ordered as a rush. Rush orders, especially in this busy market, can get very expensive
- Location. Lots of appraiser competition in a larger metro market will keep pricing down. Properties in suburban and rural areas can be more expensive
- Size, value, and complexity of the property
- The number of units (1-4) in the property
- And if any secondary reports are being generated at the same time including 1007 appraisal (market rent appraisal form for investment 1 unit properties) and 216 appraisal (operating income statement form for 2-4 unit investment properties)
When your appraisal is order the following occurs:
- Your appraisal is ordered by Durnford Team through a 3rd-party appraisal management company (AMC)
- The AMC locates, confirms availability, and assigns the appraisal inspection to a local appraiser that is part of that AMC's network
- The appraiser reaches out directly to you or designated contact on a refinance - or the seller, agent, or contact on a purchase - and schedules the on-site inspection
- The appraiser conducts the on-site inspection lasting from 30min to <1hr
- The appraiser completes their research and generates the appraisal report
- The report is forwarded to the AMC for quality control review
- The report is forward to Durnford Team and you
- We immediately upload the report to the lender for review
Generally not long. Remember, this is not a detailed interior home inspection that you would typically do on a purchase. The appraiser is confirming the information already researched on your property about your property's condition, sizing, and characteristics and then likely drive-by comparable properties in the area. The visit can range, depending on the size of the house, usually from 15min to <1hour but averaging closer to 30min.
The actual report will take anywhere from hours on a rush report to over a week after the appraisal inspection. When the market is busy as it is now, the entire process can take weeks from order to report, so we at Durnford Team typically order the appraisal the same day the file is submitted to underwriting.
Maybe. Transfers of recently conducted appraisals (typically <4mths old) can be negotiated depending on the lender and the loan program. There will be a cost to you for the transfer as the appraisal report will need to be rewritten into the new lenders name and this cost, assessed by the appraiser, can range from $100-250.
The buyer typically pays the fee which is billed soon after the appraisal is ordered at the early stages of the loan process. Since the time to order, schedule, inspect, and generate the report can be weeks, it is critical to get the appraisal going early, and this is paid by the borrower before close.
Absolutely! Regulations allow real estate agents, or other persons with an interest in the real estate transaction, to communicate with the appraiser and provide additional property information, including a copy of the sales contract. An agent, or other persons with an interest in the real estate transaction, may not intimidate or bribe an appraiser and an appraiser may not disclose confidential information at any time.
No. All real estate transactions must be conducted at "arms-length" such that none of the critical elements of the mortgage transaction (including property valuation) can not be influenced by pre-existing relationships. As the originator of your loan, we can not directly contact the appraiser and appraisal setup and communications will be completed through a Appraisal Management Company (AMC) which acts as the manager of the transaction. When the appraisal is ordered through the AMC, then the AMC utilizes its list of local contacts to schedule and complete the property appraisal. You can speak to the appraiser directly on general questions and can provide supporting documentation but you cannot unfairly attempt to influence the integrity of the appraisal.
A broker price opinion (BPO) is an opinion of value conducted by a real estate agent / broker. BPOs can be used in place on certain mortgage-related transactions including foreclosures, short sales, and hard money and some non-QM loans. Some of the items considered when completing a BPO are:
- Details about the home and its condition
- Information about the home’s location, building type, and size
- An overview of the local housing market, local foreclosures, and current real estate market trends
- A review of at least three comparable homes in the area that were recently sold and another three homes that are currently listed for sale
Depending on the loan program (typically only conforming loans) an appraisal waiver may be available as an option. This waiver allows qualified home buyers to skip the in-person appraisal process when buying a home. Instead, lenders use data generated by an automated underwriting system to determine the value of the home based on the information it has collected from other recent home sales in the subject property area.
No, conducting an appraisal and getting a new, and likely higher valuation on your property, will not affect your taxes. The appraiser does not report the appraised value or anything real estate related they see in the home including non-permitted decks, additions, or converted garages, to the tax assessor or other government entities.
- Accept the value and renegotiate the assessed price vs. the contract price with the seller on a purchase, and on a refinance / cash-out refinance, your rate may increase if your loan to value increases due to the lower property value.
- Appraisal Rebuttal. Unfortunately our experience has not been favorable on rebuttals for a number of reasons including, 1)It's a complicated procedure in which the appraiser and appraisal management company's progression of the rebuttal could be haphazard and unclear. 2) Appraisers dislike being told that their valuations are incorrect, thus values rarely or never change, and 3) It is the borrower's obligation to provide rebuttal information / comparisons, and the quality information required to develop a compelling rebuttal is tough to obtain by.
- If there are apparent inaccuracies in the assessment, whether few or significant, these modifications will be assessed by the Appraisal Management Company, who will evaluate revisions directly with the contracted appraiser. In our experience, errors are usually quickly resolved by AMCs, who then provide the revised appraisal.
Homeowner's Insurance
Homeowners insurance protects you against financial loss due to accidents, theft, and natural disasters. Most conventional insurance policies offer four types of coverage: structural coverage, personal property coverage, liability protection, and supplementary living expenses coverage. You can learn more about these four major safeguards by clicking here.
In most cases, homeowner insurance policies exclude damage and claims caused by:
• Flooding, including backups in drains and sewers
• Landslides, earthquakes, and sinkholes
• Bird, vermin, fungal, or mold infestations
• Abuse or wear and tear
• Nuclear danger
• Government action, including military action
• Power outage
Additional coverage for risks not covered by your normal insurance can usually be purchased. Flood insurance is available (and frequently required by lenders), as is earthquake and widestorm (hurricane) coverage.
Your homeowners insurance policy rate will take into consideration a range of factors including:
- The subject building's construction type, roof type, condition and age of the home, heating type, swimming pool, security systems, and more
- Geographic/climate related items such as flood zones, fire-prone areas, and proximity to coasts/water
- Neighborhood characteristics including crime rate
- Homeowner history of insurance claims
- Credit history
- Proximity to a fire station
- Deductible
- Other additions (riders) to the policy including additional structures, flood, earthquake, and others
HO-6 insurance is specifically for condo owners. It covers everything inside your unit ("walls-in" coverage), as well as personal liability and additional living expenses. Condo policies sometimes include a small amount of dwelling coverage, as some condo owners are responsible for the interior walls of their units. Because condo residents only own their unit, and not the whole building, the condo association has its own master insurance policy that protects common areas, grounds and external parts of the building. Condo owners help pay for the association’s insurance in the form of condo or HOA fees.
The HO-4 insurance policy is another name for standard renters insurance. Renters insurance protects personal property and offers liability coverage for the renter. Some policies also include additional living expenses, which could help pay for food and hotel bills if the rental home was damaged and you had to move out temporarily. HO-4 policies are "walls-in" coverage only and do not offer any coverage for the building’s structure.
When closing on a purchase mortgage, you can choose to pay for your policy up front or at closing with the rest of your closing costs. If you pay before the close of your mortgage, we'll need to see the receipt of payment along with the evidence of insurance / declarations page and the RCE (replacement cost estimator) to provide to the lender as proof of coverage. If you choose to pay at closing with the rest of your mortgage closing costs, your insurance agent will need to provide the policy invoice so that title will know to pay at close. For either of these payment choices on a purchase mortgage, your lender will require that you pay for the entire first year’s premium to insure the property is fully protected at close. This is unrelated to the insurance payments that need to be paid with your mortgage payment escrows (if escrows are set up with your payment) since these are collected monthly with your payments to pay for your renewal policy next year.
Of course! You can switch homeowners insurance policies at any time, whether your current policy is expiring or you’re in the middle of a policy term. Keep in mind these following steps to to ensure that all relevant parties are updated:
- Activate your new insurance policy. Once you’ve selected the policy you want to switch to and confirmed you are eligible for coverage, go ahead and activate that policy. You’ll want the new policy to be in place before cancelling your existing policy to avoid a lapse in coverage. When choosing an effective date for the new policy, you can use the date your existing policy is going to expire if it’s coming up soon. If you are refinancing your mortgage, you may want to use the closing date of your loan. Ultimately, the new effective date is your choice.
- Cancel your existing insurance policy. When your new policy is in place, your existing insurance carrier will need to be notified to cancel the policy. The cancellation date should match the effective date of your new policy. You can simply call your current carrier and verbally request to cancel, or, if you prefer not to call your carrier, your new carrier/agent can assist you in cancelling. They’ll prepare a policy cancellation request form for you to sign which they’ll send to your existing carrier. If you’ve already paid for your current policy for the year you’re entitled to a pro-rated refund for any unused premium. Your existing carrier will issue this refund once they process your request to cancel the policy.
- Update your lender. It’s important that you let your lender or mortgage servicer know you’ve changed policies as soon as you can. No matter how you pay for your insurance, your mortgage company needs proof that you have an active policy or else they may purchase a policy for you. If you pay for your insurance through an escrow account, updating your lender also ensures that future insurance payments are sent to the correct insurance company.
In most states, insurers use credit-based insurance score reports—which is different from your regular credit score—to determine premiums. Insurance companies check credit scores in order to gauge the risk they might undergo because studies have shown that those with lower credit scores are likely to file more claims or have more expensive claims. Insurance companies check credit scores when delivering quotes on a soft pull basis, which is a type of inquiry that will not negatively impact an individual's credit score. These inquiries will be visible on personal credit reports, but they are not visible to lenders and have zero effect on credit score. A soft inquiry/soft pull allows a creditor to review a person's credit report and credit score to get a sense of how well the person is managing their credit. A soft inquiry can occur even when an individual checks their own credit report.
Post-Closing & Payments
Depending on how your loan was structured, there are typically three or four parts of your mortgage payment:
- Principal: Repayment of your outstanding balance.
- Interest: Payment of the interest charged on the outstanding balance.
- Taxes (if escrowed): One-twelfth of your expected annual property taxes will be included in your mortgage payment, and deposited into your escrow account.
- Insurance (if escrowed): This includes homeowner's insurance, as well as any other hazard insurances you're required to have, such as flood or windstorm. If you put less than 20% down on your loan, this can also include private mortgage insurance.
Combined, the 4 items are known as your mortgage payment PITI (principal, interest, tax, insurance).
After your loan closes, you will receive instructions directly from the lender you closed with, or the new "loan servicing" company, by email and in writing on where to direct your first payment. Official notification of your payment instructions will come via US mail. If there is any delay of instructions or issue with servicing company, please contact us directly to see what we can do to assist.
If your loan is set up with escrowed taxes and insurance, at close the lender / mortgage servicing company will set up an escrow account to collect funds for the payment of your real estate taxes, homeowner’s insurance, and private mortgage insurance (if applicable). Each month a portion of your payment will be held in your escrow account to make sure the funds are available when these tax and insurance payments are due. When setting up your mortgage, in most cases you can waive impounds and pay your own real estate taxes and insurance directly, but unless you have a specific reason to do so, it is always a prudent move to have these payments escrowed and avoid any issues if a property tax or insurance payment is not made in a timely manner.
No, for most loans there is no requirement or cost to waive the escrow account. Some loans, including jumbos and non-QM loans may have a escrow account requirement or may assess a lender fee to waive the requirements.
No. Any balance in your current escrow account at the time of new loan funding will be refunded to you by your current mortgage servicer. This typically happens within 3 weeks from time of closing.
Likely not. Lenders lend - and mortgage servicing companies do a great job at coordinating and fulfilling your monthly payments. Typically your loan will be transferred, post-close to a 3rd-party company to make your monthly mortgage payments. Likely this will be all set up before your 1st payment, but can occur anytime during the life of your mortgage. But, rest assured that you will be fully updated on any changes and there are legal frameworks in this transferring process that protects the borrower, and your loan terms and rate cannot change due to any servicing transfer.
Lenders who originate the loan when you close have to make a decision after close to a) sell the loan in the secondary market (most do) and b) if they, or a 3rd-party company will be servicing the mortgage payments after close. Lenders sell the mortgage after close to replenish the funds available to them after closing your loan. Lenders maintain a short-term warehouse line of credit which is used to fund the close of loans. Immediately after, lenders will coordinate to sell the loan with a wide range of institutional money including Freddie Mac, Fannie Mae, insurance companies, REITs, and financial firms. If originating lenders did not sell their loans they would run out of money to sell as soon as their warehouse line of credit is used up. So, for liquidity in the mortgage market, expect your loan to be sold in most cases and, by law, you will be properly informed of the loan or servicing company transfer. The good news is that your loan terms, rate, or balance cannot change due to the transfer.
By law, both the old mortgage owner and the new mortgage owner must send you notification no less than 15 days before the transfer. The new lender must provide contact details within 30 days after the transfer is complete so you know where to send payment and how to get in touch if you need help. And don’t worry if you send payment to the old lender; you get a 60-day grace period, so your loan won’t be delinquent if you make a mistake with that first check going to the old company.
Only the taxes and insurance. Even with a fixed-rate loan, your payment is likely to change over time. The reason? Your property taxes and insurance expenses, upon which the escrow portion of your payment is based, tend to fluctuate. If they rise, it may be necessary for your lender to ask for a higher escrow payment to cover the shortfall.
If your insurance or taxes go up during the term of your mortgage and you have an escrow shortage, those bills can never go unpaid even if there isn’t enough money in your escrow account to pay for them. So, the loan servicing company will pay the money needed on your behalf and the shortage will then need to be repaid by you as billed in the future.
Mortgage Strategy
Usually people refinance 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 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: Calculate the total cost of the refinance 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. Since refinancing is a complex topic, consult a mortgage professional.
When interest rates are historically low, like they are now, a fixed-rate mortgage makes good financial sense. Not surprisingly, the vast majority of mortgages originated today are fixed-rate. In fact, only about 3% of buyers are choosing adjustable-rate loans. That said, while a fixed-rate mortgage is the best choice for the majority of homebuyers, there are some circumstances where an ARM may be better. For example, if you expect to sell the house before the fixed-interest period ends and the rate starts to float, an ARM could end up saving you thousands of dollars. Or, during periods of falling interest rates, an ARM can allow you to get a low initial rate, and will save you money later if rates drop further.
Home Buying Tips
- Understand local sales prices — Request comparable house sales from your realtor or conduct your own research to compare your offer to current price tags. The listing agent may already have prepared a comparative market analysis (CMA) for the property. This written report examines similar property prices that are now on the market, under contract, or have sold in the last several months.
- Know the state of the house and neighborhood - Before making an offer, you should be reasonably certain that you are aware of any major issue areas in the house. You should have inspected the house to the best of your abilities, questioned the sales agent and the owner about the structural soundness and status of the fundamental systems, and studied the seller's disclosures. (Both sellers and real estate sales agents can be held accountable if they neglect to notify the buyer of any flaws in the home that they are aware of.) You should also have a good notion of how much it will cost to correct any big faults that you are aware of.
- Consider the circumstances surrounding the transaction before considering how much to offer. For example, if the sellers have another property under contract that is contingent on the sale of this one, you may be in a favorable negotiation position. It will be beneficial for you to understand how long the house has been on the market, whether the asking price has previously been cut, and what the home's fair market worth is based on its condition. Also, when and how much did the seller pay for the house? What is the seller's equity in the property?
- Determine your financial capabilities - Before you started house looking, you should have received a Pre-qualification, and your Pre-qualification letter should have shown the maximum purchase price you are authorized for. You should also take the time to calculate your monthly housing expenditures if you receive the property at the price you intend to offer. This necessitates an understanding of the annual cost of utilities, homeowner's insurance, condominium fees (if applicable), and any special charges. Make sure your down payment is sufficient and that you will have enough to meet the closing charges. Don't be tempted to offer more than you can comfortably afford.
- Financing terms - Keep in mind that every offer has two parts: the price and the financing terms. The terms may be more important to you than the price. For example, if the seller is ready to offer advantageous financing terms, such as paying for the title search and other settlement charges, you may be more likely to accept the price.
- The real estate sales agent would gladly advise you on how much to offer. However, the choice is entirely yours. (Remember, the agent often represents the seller.) Initially, most prospective purchasers do not give the whole asking price. For example, if you believe that the condition of the house deserves a lower price, you may wish to offer less than the asking price.
- In a multiple-offer scenario, don't get carried away — Maintain your market study and bargain with a clear mind. If you provide better terms, you may win the auction and yet receive a cheaper price.
- Control your emotions — No matter how badly you want the house, knowing you overpaid will undoubtedly make you feel worse.
- Don't be afraid to walk away — unless it's a one-of-a-kind property, you'll most likely discover another house that you enjoy just as much.