Mortgage Industry FAQ – Part 3


Q41.   What is a sub-prime loan?

A.   A sub-prime loan is characterized by high interest rate as compared to those of traditional or prime rate loans. A borrower with low credit ratings will not be considered for any of the prime loans detailed above. In such an event, he may apply for a sub-prime loan. This facility is primarily extended to those individuals who cannot afford a down payment. A chief drawback of the sub-prime loan is that the borrower will have to make higher monthly mortgage payments over a long period.

Q42.   Does a sub-prime loan offer any benefit?

A.   A sub-prime loan is offered to a borrower who cannot avail of any other loan facility to buy a home. It has the added benefit that the rates of interests are not fixed for sub-prime loans tendered by different lenders. Consequently, a borrower may shop around to look for a rate that suits him the most. Additionally, the borrower can resort to this category of loan to settle credit card or other high interest debts.

Q43.   What is a temporary buy down mortgage?

A.   This is a mortgage loan in which a lump amount has to be paid at the beginning of the term and the initial monthly rates of interests are offered at discounts. The rates increase slowly to a pre decided value over a period of one, two or three years. The reduced monthly payments enable the homeowner to spend money for other requirements of the house.

Q44.   How does a buy down mortgage help the borrower?

A.   A buy down mortgage loan program increases the eligibility of a borrower who would otherwise not make the grade. This is because the buy-down scheme asks for lower payments, which are simpler to meet.

Q45.   What happens if the homeowner is unable to pay the lump sum at the beginning of the term?

A.   The lending institution pays the lump sum if the owner expresses inability to make the payment. However, the monthly rates become slightly higher.

Q46.   What is the loan to value ratio?

A.   The loan to value ratio is the principal sum of the loan contrasted with the appraised worth of the property. This ratio indicates the amount of stake the homeowner has in the property. A high loan to value ratio implies that the homeowner has a small equity or stake in the property. In other words, the homeowner has not contributed a significant amount towards the purchase of the home. The majority of the funds is given by the lender.

Q47.   What steps are taken to protect the lender against a default on the repaymentof the home buyer?

A.   A mortgage insurance policy has been instituted for loans with a high loan to value ratio. This protects the lender from a possible default in mortgage payments on the part of the buyer. The homeowner has to pay a premium for the insurance policy.

Q48.   Is it possible for the homeowner to get rid of the mortgage insurance policy?

A.   A homeowner may cancel the mortgage insurance when he achieves a stake of at least 20% after paying the regular monthly mortgage payments. An additional condition is that the value of the home must not fall. Furthermore, the property prices in the immediate area should not fall. The buyer should request the lender to initiate proceedings to cancel the insurance.

Q49.   How to get information regarding mortgages?

A.   The fees and rates for different categories of mortgages are put out in newspapers in columns devoted to real estate sections. You may look up mortgage websites, as well for the information. Information may be had from mortgage brokers. It is prudent to do some research to get a feel of the mortgage loan market before approaching a broker.

Q50.  What is a mortgage broker?

A.   A mortgage broker carries out business of marketing various mortgage products and options of other lending institutions. A broker buys mortgage loans in bulk from a number of lending houses at wholesale prices and sells these products to prospective homeowners. The buyer pays a fee to the broker for taking on his services.

Q51.   What are the advantages of using the services of a mortgage broker?

A.   The buyer gets the opportunity to review all the loan products at the same time and make a comparison analysis. In addition, the broker utilizes his knowledge of the loan market to buy the loans at best prices from the lender. Consequently, he can tender the loans at low rates of interest to the customer.

Q52.   What are the limitations of using a broker?

A.   As is the situation with any other industry, some mortgage brokers are unscrupulous in their dealings with the clients. It is a prudent idea to check on the reputation of a broker before engaging his services for buying a mortgage loan. The buyer should get a feel of the loan market, ahead of approaching a broker.

Q53.   What is the mode of payment to the broker?

A.   Some mortgage brokers collect a fee from the client directly, while others charge the lending institution. In the latter situation, a small amount is added to what the client has to pay for the mortgage.

Q54.   What financial documents need to be presented for getting a loan?

A.   The lender may ask for your pay receipts for the last month, income tax returns for the last two years, business tax returns for self-employed individuals, proof of assets, bank account records for three months and a bank statement providing the details of the down payment.

Q55.   What other information should be shared with the lending institution?

A.   You are required to provide the names and contact details of your proprietors and employers for the past two years. Other details, like information on existing debts will have to be provided.

Q56.   How can a prospective homeowner choose a suitable loan program?

A.   The right mortgage program depends upon how long you intend to stay in the house. It depends upon the amount you can spare for monthly payments, as well. If you plan to stay at the house for less than 5 to 7 years, adjustable rate mortgage and balloon loans are suitable options. If you intend to stay in your home for a greater period, the 15- or 30-year fixed rate mortgages are reasonable options.

Q57.   What does pre-qualifying for a mortgage mean?

A.   A pre-qualification is performed by a mortgage consultant. He will advise you on the amount of mortgage loan you may be able to purchase. A pre-qualification does not ensure you a loan. If the officer decides that you pre-qualify, he will issue a pre-qualification letter. The letter states that your finances have been appraised and that you may be approved for a mortgage loan. You may present this document to the seller.

Q58.   What is a pre-approval procedure?

A.   The process of pre-approval verifies your income, credit, ability for down payment and many other factors. After the pre-approval process, you may present a request for the loan. Once the pre-approval is performed, the mortgage loan may be closed swiftly as all the verifications have been confirmed for loan approval.

Q59.   What is a further advantage of a pre-approval?

A.   A pre-approval may help you reach a better deal with the seller.

Q60.   What factors decide the chance of a borrower getting a mortgage approval?

A.   The criteria for meeting the approval are varied for different lenders. The borrower must present documents stating his credit rating, credit scores and the debt to income ratio. Additionally, the borrower must be able to make a down payment of 5% in the case of conventional mortgages and 3.5% for FHA backed loans.

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

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