Mortgage Industry FAQ – Part 1

Q1.   What is a mortgage?

A.   A mortgage is a loan secured from a lending institution to buy real estate property. It is a legal claim on a property that obtains a promise from the borrower to pay off the debt. All mortgages have two common aspects, which are the principal and the interest.

Q2.   Where can I get mortgages for home loans?

A.   You may get mortgages from banks, insurance companies, mortgage bankers and credit unions.

Q3.   Do mortgages offered by all institutions follow the same standards?

A.   Mortgages offered by all institutions follow pretty much the same standards. All offerings must necessarily comply with government rules. The Federal National Mortgage Association or “Fannie Mae,” and other semi-governmental bodies, set the regulations for home buying loans.

Q4.   What are the guidelines laid down by these bodies?

A.   The guidelines relate to the maximum amount of the loan, the amount of down payment to be made by the borrower, the income of the borrower and the borrower credit. Fresh loan limits are set every year.

Q5.   Is a property inspection required?

A.   An inspection of the property is not a necessary requirement for most establishments supplying the mortgage loan. However, it is recommended that you get a property inspection performed for your own satisfaction before settling down to secure the loan.

Q6.   Is a property appraisal a necessity?

A.   A property appraisal is required by lenders offering mortgage loans. An appraisal establishes the worth of the home. The value of the property is used to decide the terms of the mortgage loan.

Q7.   What are the various categories of governmental loans?

A.   Governmental loans are of three categories. They are FHA, VA and RHS.

FHA loans are provided by the Federal Housing Administration. This organization is a unit of the Department of Housing and Urban Development (HUD) of the USA. It offers loans backed by insurance to citizens of the USA, residents with green card holders and foreigners with valid work permits. The applicant has to satisfy certain financial criteria.

VA loans are guaranteed by the US Department of Veteran Affairs to individuals serving in the military and to retired personnel who have been discharged from service honorably. It must be noted that the US Department of Veteran Affairs does not issue the mortgage loan. The organization provides a guarantee to the loan provided by a lender.

The RHS loans are guaranteed by the Rural Housing Service of the Department of Agriculture of the USA.

Q8.   What are the features of FHA loans?

 A.   This category allows qualified individuals to secure loans to buy reasonably priced property. The borrower may make a down payment of 3.5% of the total amount. If the borrower defaults, the FHA pays the full amount of the loan. The borrower repays the loan to the FHA.

Q9.   What are the features of VA loans?

 A.   VA guaranteed loans enable the borrower to secure loans with little or no down payment. The applicant is required to meet certain criteria like credit history, length of service and nature of current employment. If the borrower defaults on payment, the VA pays the full amount to the lender, which may be a private enterprise and the borrower has to pay the VA.

Q10.   What are the features of RHS loans?

A.   RHS backed loans allow the borrower to secure loans with no down payment.

Q11.   What is a conventional loan?

A.   Any loan that is not backed by the FHA, VA or the RHS is a conventional loan.

Q12.  What is a conforming loan?

A.   A conforming loan is a conventional loan. The terms and conditions must abide by guiding rules set down by Freddie Mac and Fannie Mae. These are corporations owned by stockholders. These institutions buy mortgage loans from lending houses and convert the loans into securities. The securities are sold to investors. Consequently, a supply of funds is provided continuously for the benefit of the borrowers.

Q13.   Does a conforming loan have an upper limit?

A.   A conforming loan does have an upper limit. The limit is increased from time to time. It is 50% higher in the US Virgin Islands, Guam, Hawaii and Alaska.

Q14.   What is a non-conforming loan?

A.   Any loan that is higher than the conforming loan limit is termed a non-conforming loan. These are not funded by the banks. Non-conforming loans are funded by other private institutions or moneylenders.

Q15.  What are the types of non-conforming loans?

A.   These are commercial or residential in nature. The former category funds movie theatres, amusement parks, hospitals and other commercial ventures. The residential loans finance residential real estate. All commercial loans have very high interest rates.

Q16.   What are B/C loans?

A.   Loans that do not follow the guidelines set by Fannie Mae and Freddie Mac are B/C loans. These are offered to individuals who have filed for bankruptcy. The loans present funds to the applicants for a brief period until they are eligible for conforming loans.

Q17.   What is private mortgage insurance (PMI)?

A.   Private Mortgage Insurance is a policy that constrains a borrower to pay premiums up to one-half of 1% every month. This policy is generally applicable when borrowers make a down payment not exceeding 20%. The premiums do not need to be paid when the share of the borrower in the property becomes more than about 25%. Additionally, the monthly payments have to be made timely.

Q18.   What are the drawbacks of making low down payments?

A.   A borrower may have difficulty in getting loans that require less than 20% down payment. In addition, interest rates are higher for such loans. An exception is made for loans backed by government guarantees like the FHA loan discussed earlier.

Q19.  Do FHA and VA backed loans require the payment of PMI?

A.   PMI has to be paid for FHA backed loans. On the other hand, loans backed by VA do not require the monthly payments of PMI even though there might not be any down payment for the loan.

Q20.   How are the rates of interest on the loan determined?

A.   The interest rates are decided by the financial fluctuations of the market. The rates could vary once daily or more than one time in the day.

 Part  1Part  2Part  3, Part  4,   Part 5

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