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Buying preconstruction | Glossary of Terms |
Frequently Asked Questions (FAQ)
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FREQUENTLY ASKED QUESTIONS page 2
- Am I eligible for VA financing?
First of all, send for your Certificate of Eligibility
from the Department of Veterans Affairs (VA). When you
were discharged, you were given a document called a
DD-214. Send a copy of this form along with your request
for eligibility. You should receive an answer in 1-2
weeks. You need to have a minimum of 90-days of active
duty.
- What is a "No Doc" or "Low Doc" loan?
No documentation or low documentation loans are offered
to people who have 25% or more of the down-payment. For
lenders this is a low-risk situation because you have a
lot to lose as well as they, given your large financial
investment into buying the property. There are certain
conditions for this. The down-payment must be your own
money and not a gift, you must have an excellent credit
history, and your income must be enough to easily fall
into the qualifying ratios.
- What is a "self-insured" mortgage?
Some mortgage lenders offer programs with no PMI (Private
Mortgage Insurance) insurance. The interest rate is
usually higher by ½% for the term of the loan. This is a
"self-insured" mortgage, where the lender will accept the
higher risk of a low down-payment if you will agree to
pay him more for the mortgage. Also, the closing costs
for these loans is less because there are no up-front PMI
insurance premiums.
- What are COFI ARMs and LIBOR ARMs?
The COFI annual percentage rates (ARMs) use the Cost of
Funds Index (COFI), while the LIBOR annual percentage
rates uses the London Interbank Offered Rate (LIBOR). It
is best to compare these with the more usual one-year
treasury securities index, to see what is best for you.
- What is a "flex" mortgage?
Basically, it is a mortgage that will change types in the
future. For example, a "5/1 flex" means a 5-year
fixed-rate mortgage with a change to a 1-year ARM for the
remainder of the term, after the initial 5-year period.
Make sure you find out what the worst-case scenarios
would be here, before you sign on. All the adjustment
terms should be crystal clear.
- What is 80-10-10?
This is a financing option that you choose to avoid PMI.
The "80" refers to an 80% mortgage. The "10" refers to a
10% second mortgage, and the second "10" refers to the
required down-payment of 10%. This is a good mortgage,
but you do have to pay for both the mortgages every
month; the accumulated payment is often higher than with
PMI.
- What are biweekly mortgages?
You make your mortgage payment every other week rather
than every month. This way you end up making 26 payments
in a year. This often reduces the amount of interest
being charged and reduces the term of the loan as well.
- Are new FHA and VA loans still assumable?
Yes, they still are. Both FHA and VA require that the
assumptor have the same qualifications as the original
borrower and that the assumptor be liable for the loan
after assumption. Also, the assumptor must actually
occupy and live in the house.
- What is a one-year ARM with equity participation?
Equity participation is also known as "negative
amortization" (see Glossary). You make monthly mortgage
payments below what is needed to repay the loan. The
amount unpaid in the monthly payments is actually added
back into the loan, thus increasing the loan balance.
- What is difference between PMI and MIP?
PMI (Private Mortgage Insurance) is issued on
conventional loans. An independent insurance company
issues an insurance policy that guarantees the mortgage
company that they will pay a percentage of the loan if
you stop making your payments and the loan goes into
default. Therefore, if you put down 5%, the lender will
want the loan covered for 25% of the full amount insured
or covered. A Mortgage Insurance Premium (MIP), on the
other hand, is issued on FHA loans. Here, the FHA acts as
the insurance agent on the loan and issues coverage on
the entire loan amount. If you default, FHA pays the
lender in full and takes the house back to sell. You
cannot eliminate MIP insurance. The FHA covers the loan
for the full term. However, a PMI may be eliminated if
your payments are always punctual and you prove to the
lender (usually through an appraisal) that the property
no longer needs a policy for 25% coverage (because of
increase in property value).
- What is the 2% rule?
This is the difference between the interest rate on your
old mortgage and the new proposed interest rate. If you
reduce your old mortgage by 2%, you are often told to
refinance. But you should realize that it is often not a
good idea to refinance, because the cost of doing so may
run into 3% of your mortgage amount. Instead, you might
want to reconsider moving to a better home, rather than
refinancing your old one.
- How can I make sure that I am not over-charged at
closing?
Many companies and individuals are involved in the sale
and purchase of a home. The good-faith estimate is your
best indicator as to your charges. Keep in mind, however,
that most lenders always guess high, so when it comes
time to actually paying the bills, you are paying a
little less than estimated.
- Do I have to have a tax and insurance escrow
account?
There is no law stating that you have to have these
accounts in place. But lenders do expect them. If,
however, you have a large down-payment (25% and over),
this rule for an escrow account may be waived. But you
should also remember that not having an escrow account
means that you have to be disciplined enough to look
after your own insurance and tax payments
- What is a lock-in?
Home loan interest rates change daily. They can even
change more than once in a single day. When you get a
quote from a lender, it becomes your rate, which you can
"lock-in" with your lender. A "lock-in" is a written
promise to close your loan at a certain interest rate.
Always get a lock-in guarantee that is clearly defined.
Get the expiration date, interest rate, and points paid
by buyer and seller.
- Why do mortgage rates go up and down all the time?
There are a lot of investors making home mortgage loans
in the market. The best way to gauge the movement of
interest rates is to watch the bond market.
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