Smith Broady & Associates Knowledge Center:
“How to apply for a home loan” can seem like a huge question filled with many different answers. At Smith Broady and Associates we make the answer simple, work with us! We guide you through the process of how to apply from a home loan, all the way through to your final closing. But we know you might have some questions while you are choosing the best mortgage company for you, so here are some answers to our most frequently asked questions.
Why does Smith Broady & Associates show a lower credit score than what I found on some of the Internet credit score services?
Smith Broady & Associates and mortgage brokers/lenders use what is often referred as a “tri-merge” to determine your credit score. A tri-merge is an average of your credit score from the three credit rating bureaus (Equifax, Experian, and TransUnion). An example of a credit score tri-merge is provided below.
What recommendations does Smith Broady & Associates offer to improve my credit score?
There are a variety of strategies available to increase your credit score. The Loan officers at Smith Broady & Associates will work with you to help you increase your credit score. A common method used to increase your credit score is the use of a secured credit card and making consistent payments. Contact Smith Broady & Associates to discuss your credit score status and specific ways to improve your rating.
What is Hazard Insurance?
Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards.
What is PMI?
PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home’s value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.
What is an Escrow Account?
When you put money in escrow it is held by a neutral third party (called an escrow agent) who works for both the lender and the borrower. The agent’s role is to carry out the instructions agreed upon by both parties. The money is released when all the terms of the agreement are met.
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Actual Interest Rate – One of two interest rates associated with a loan. The Actual Interest Rate is the annual rate of interest you pay on your loan. It may also be referred to as the “note rate.” It is the rate used to calculate your monthly payments.
Adjustable Rate Mortgage (ARM) – A mortgage loan or deed of trust which allows the lender to adjust the interest rate in accordance with a specified index periodically and as agreed to at the inception of the loan.
Amortization – A calculation that shows the periodic payments of both principal and interest over the life of the loan from start to maturity. The amortization shows how the loan balance declines by the amount of the total scheduled payment, the amount of any extra payment, and how each payment is allocated between principal and interest. The scheduled payment less the interest equals amortization.
Amortization Schedule – A table showing the amounts of principal and interest due at regular intervals and the unpaid balance of the loan after each payment is made.
Annual Percentage Rate – One of two interest rates associated with a loan. The Annual Percentage Rate (APR) includes the interest and any additional costs or prepaid finance charges you might pay. Additional costs that are considered in the APR include prepaid interest, private mortgage insurance, closing fees, points, etc. The APR represents the total annual cost of credit with all charges included. It will usually be slightly higher than the Actual Interest Rate because it includes these additional costs, assuming you keep the loan to maturity.
Appraisal – A written analysis of the value of your home. An appraisal is performed and prepared by a licensed professional, using objective criteria, to set an estimated property value. The appraisal will determine an approximate fair market value based on recent sales of similar homes in your area. New mortgages and most refinancing packages require an appraisal as part of the loan process.
Balloon Mortgage – A short-term fixed-rate loan with fixed monthly payments for a set number of years followed by a single balloon payment for the entire amount of remaining principal at the end of the term. Typically, the balloon payment may be due at the end of five, seven, or ten years. Borrowers with balloon loans may have the right to refinance the loan when the balloon payment is due, but the right to refinance is not guaranteed.
Blanket Mortgage – A lien on more than one parcel or unit of land, frequently incurred by subdividers or developers who have purchased a single tract of land for the purpose of dividing it into smaller parcels for sale or development. Also called a blanket trust deed.
Cash Out – The cash you receive when refinancing with a new loan that is larger than the amount you owe on the existing loan, based on your equity in the house. The cash out amount is calculated by subtracting the sum of the old loan and fees from the new mortgage loan. For example, if your existing loan is $150,000, you might refinance it with a loan of $170,000. After you pay off your current loan ($150,000), you would be left with $20,000 cash out, unless there were other costs or fees to be deducted from the $20,000.
Closing (or Settlement) – The settlement or closing is the conclusion of your purchase or sale. It includes the disbursement of funds, signing of legal documents and transfer of title necessary to the conclude the sale of your home (or loan transaction for a refinance).
Closing Costs – Also known as “settlement costs,” these represent fees for services that must be performed in order to process and close your loan. Examples include title fees, recording fees, appraisal fee, credit report fee, pest inspection, attorney’s fees, taxes, and surveying fees. Closing costs vary by geographic location.
Conforming Loan – A mortgage loan that meets all requirements to be eligible for purchase by federal agencies such as Fannie Mae and Freddie Mac.
Conventional Loan – Loans made by a bank to a party that do not include any government housing program or subsidy.
Credit Report – The report that issues a “credit score” based on the results of the three major U.S. credit bureaus (Equifax, Experian, and TransUnion). The individual scores from all three bureaus are averaged into an overall score. Lenders obtain a credit report for any loan application to determine eligibility and interest rates available to that applicant. The higher the score, the easier it is for that person to obtain a loan. The cost for this is usually between $15 and $40.
Credit Score– A statistical method of rating your creditworthiness. It considers your credit card history; outstanding debt; the types of credit you use. Some items that may adversely effect your credit score are late or missed payments; collection accounts and judgments; too many credit lines with the maximum amount borrowed; or even too little credit history.
Down Payment – The percentage of your home’s purchase price that is paid in cash at closing. Most conventional loans call for a minimum of 20% down payment in order to avoid carrying private mortgage insurance. However, different loan types have different down payment requirements. Your Loan Officer can help you determine what the most affordable program is for you.
Equity – Net ownership, the difference between the fair market value of a property and the total debt against the property. For example, if you currently owe $100,000 on your mortgage but your home is currently worth $120,000, you have $20,000 equity – or full ownership of $20,000 of the home’s value.
Finance Charge – The total of all the interest you would pay over the entire life of the loan if you kept the loan to maturity and paid exactly as called for by the loan terms with no additional principal payments. It would include all prepaid finance charges paid by the buyer, such as origination fees, discount points, mortgage insurance, and other applicable charges.
Fixed Rate Mortgage – A “traditional mortgage” with an unchanging interest rate for the life of the loan.
Good Faith Estimate – Written estimate of the closing costs the borrower can expect at closing. Lenders are required to provide this disclosure to the borrower at different points throughout the loan process.
Homeowners Insurance – Homeowners insurance protects you from theft and many kinds of potential damage to your home and its contents. It is required by all lenders to protect their investment, and must be obtained before closing. In most cases, coverage must be equal to, or greater than the loan balance, or the value of the home. The cost will vary based on where you live and the value of your home.
Jumbo Mortgage – A mortgage larger than the limits set by Fannie Mae and Freddie Mac. This limit is changed periodically. A Smith Broady & Associates loan officer can tell you the current limit. This does not mean that you cannot borrow more than the limit, it simply means that the Fannie Mae and Freddie Mac agencies would not service the loan.
Lender – The bank, mortgage company, or mortgage broker offering the loan.
Lien – A formally recorded claim by a party placed on the property of another for security against a debt. If someone files a lien against your property, it means that if you do not pay the debt they are owed, they can collect the funds from the proceeds when your property is sold.
Loan Origination Fee – Fee charged by a lender to cover administrative costs of processing a loan. This usually includes the evaluation, preparation, and submittal of the loan.
Mortgage Payment – Typically a monthly payment that may contain up to four parts: principal, interest, taxes, and insurance. If you pay your taxes and insurance on your own (not included in an escrow account with your mortgage), you pay only principal and interest to your lender.
Mortgage Broker – A third party that arranges financing for borrowers with a lender. The mortgage broker does not provide the funds for the loan, but they receive a payment from the lender for their services.
Points – An up-front fee; one point is equal to one percent of the loan amount. Many lenders allow customers the option of paying ‘points’ in exchange for a lower interest rate on the loan.
Pre-approval – The process of determining how much money you will be able to borrow for a new mortgage or refinance before you actually apply for a loan. A pre-approval includes a preliminary screening of a borrower’s credit history. Information submitted during pre-approval is subject to verification at application.
Private Mortgage Insurance (PMI) – Insurance written by a private company protecting the mortgage lender against financial loss occasioned by a borrower defaulting on the mortgage.
Tax Lien – Claim against a property for unpaid taxes.
Truth-in-Lending Act – Federal law requiring written disclosure of the terms of a mortgage (including the APR and other charges) by a lender to a borrower after application. Also requires the right of rescission period.
Warranty Deed – A deed in which the grantor or seller warrants or guarantees that he/she is conveying good title, as opposed to a quit-claim deed which contains no representation or warranty as to the quality of title being conveyed.