Knowledge Base

Fixed-Rate Mortgage Loan

This program allows an applicant to amortize the payment of his or her home mortgage loan over a number of years, usually 30, 20 or 15 years. Under the fixed-rate loan program, an applicant makes monthly payments of principal and interest to the lender for the predetermined term. The principal and interest payments are fixed – that is, they never change during the entire term of the mortgage loan, making it easier for the borrower to budget his or her monthly payment. The longer the mortgage term, the lower the monthly payments; however, the higher the interest rate.

Adjustable Rate Mortgage Loan

The adjustable rate mortgage loan (ARM) has an interest rate that increases or decreases over the life of the loan based upon market conditions. The starting rate is normally lower than the rate offered on a fixed – rate mortgage loan.

The lender adjusts the interest rate on such loans at some periodic interval as specified in the note. With each interest rate change the monthly payment changes. The change rate is determined by adding a margin (sometimes called a spread) to an index mandated by the loan documents. The most common indices are six-month, one-year, and five-year Treasury bills, the California 11th District Costs of Funds Index, and the London Interbank Offered Rate (LIBOR).

ARMs are also offered in the two-steps. Two–step mortgages charge interest at a fixed rate for a certain period, say three years, and then convert to an adjustable rate. Such loans are sometimes called hybrids. Two-steps are commonly offered for three years fixed, five years fixed, and seven years fixed. Some ARMs provide conversion features. These features provide the borrower with the option to fix the rate at specified intervals.

ARMs generally contain two types of caps. The first is a period cap, which depending on the loans terms, limits interest rate increases each change date to a specific percentage (one or two percent are common). The second cap relates to the life of the loan interest changes – in many circumstances (although other caps are available), the note caps the highest rate chargeable on the loan to 6% plus the starting rate. ARMs are of special interests to buyers who know their income will rise in the future or who don’t plan to own the home for many years.

Balloon Mortgage Loan

Balloon mortgage loans have a series of equal monthly payments that do not fully amortize the loan by its maturity. Rather, at maturity a large final payment is due. The monthly payments usually are amortized over a fixed period with a balloon payment due in typically 3, 5, 7, or 10 years. In some balloon loans, the note allows for use of a predetermined interest rate index in conjunction with an extension option at the end of the balloon period. Other balloon loans however require that the borrower pay the loan upon maturity.

Nonstandard Credit or Subprime Lending

One of the ways of differentiating mortgage loan programs is by borrower credit, rather than by specific loan attributes or features. For example, “ABCD” programs are a method of grading various loans based on the credit and equity quality of the loan originated. Mortgage industry participants consider “A” loans as prime – loans with superior credit. On the other hand, the industry categorizes “B” to “D” loans as subprime – loans with less credit quality. “B” to “D” loan quality types typically require more equity (lower loan – to – value ratios). In addition, the interest rate and points are higher as the credit quality goes lower (rates and fees are inverse to credit quality). Amortization terms for such loans may be shorter than for “A” loans or the borrower may be limited to an ARM loan.

Affordable Lending

Affordable lending programs include the loan types mentioned above. However, these loans generally require lower down payments. In addition, investors allow higher debt ratios and lower income.

The Mortgage Process

The time it takes to complete the loan process varies for each application. Here is a list of the stages required to process a mortgage. Remember that completing your application accurately and fully will help speed the process.

Processing

After you apply, a loan processor will collect documents and verification to support your request for a loan. The time in processing will vary depending on the type of loan and how quickly the processor receives the documents needed. Much of processing involves help from other sources, such as:

• Appraisal – An Appraiser will judge the value of the property, generally based on the recent sales in your market.
• Credit Verification – We’ll request a credit report through a credit reporting agency to verify your outstanding debts and payment history.
• Income Verification – In addition to the documents we request from you, we’ll ask your employer to verify your income.
• Asset Verification – To confirm that you have sufficient funds required to close your mortgage.
• Previous Housing Verification – We’ll request the history of your rent or mortgage payments from your lender or landlord.

Respond promptly to any requests for additional documents. This is especially critical if your rate is locked or if you plan to close by a certain date.

Do not make any major purchases. Do not buy a car, furniture or another house until your loan is closed. Anything that causes your debts to increase might have an adverse affect on your current application.

Do not move money into your bank accounts unless it can be traced. If you are receiving money from friends, family or other relatives, please contact us.

Underwriting

Once the application is processed, your processor will submit the complete package for review. The Underwriter compares your loan request to the guidelines of the lender or its investors for the type of loan. Then the underwriter issues a decision on your application based on established investors guidelines.

On purchases, you may be required to obtain a termite certification on your home. If required, this certificate must be no older than 30 days prior to the date of settlement and the original certification must be provided to the Lender at least one week prior to the settlement.

You may be required to have a well and/or septic certification completed on your system. If required, the original certification must be provided to the Lender at least one week prior to settlement.

For purchase loans, you must obtain a one-year (1 year) paid policy for hazard insurance (with the Lender, its successors and/or assigns, listed as the loss payee). The insurance coverage should be at least the amount of the mortgage. The original policy plus the paid receipt must be provided to the Lender at least one week prior to settlement. On refinances, you must obtain a paid policy good for at least 90 days after closings.

Closing

After the loan is approved, you can close the loan. Closing occurs when you sign the papers for your mortgage loan, and when the property is transferred, if your loan is for a home purchase. Most closings take place at a title company or attorney office. On refinance and home equity loan transactions, the federal law requires that you have three (3) business days to review the signed documents before the transaction is final, you may cancel the loan within the 3-day period.