Scottsdale Real Estate and Scottsdale homes for sale buyers agent Tim Rogers representing home buyers interested in homes for sale in Scottsdale and Valley communities.

Pre-Qualified.... Pre-Approval...... Approval...
What Does it all Mean?

Many buyers think gettingpre-qualified is the same thing as getting pre-approved when in fact they are quite different. Knowing the difference between getting pre-qualified and getting pre-approved can help you avoid costly mistakes - including bidding on a home that is outside your price range While definitions change in the market, below are general descriptions of what each process entails.

Pre-Qualification

Getting pre-qualified is simply getting an idea of the price range you can afford. It is based on your stated income, assets, and liabilities. With a pre-qualification, your information is not verified and the loan your pre-qualified for is not guaranteed.

After a loan officer has made inquiries about a borrower's debt, income, and savings, he or she can write a written statement (pre-qualification) about the borrower's chances for qualifying for a home loan.

Pre-Approval

During the pre-approval process is when the information you provide a lender is verified.

You give your lender permission to obtain your credit report. Your credit report will often confirm the information you provided them about debts, your employer and how long you have lived at your current address.

It will also give them your credit score, or your credit rating. If the credit score falls within the acceptable range for the program that you're interested in, you become pre-approved. If your credit score is too low for your preferred loan program, your lender will discuss your credit report with you. Some erroneous information on the report that can be removed to improve your rating, or perhaps you have a situation that the lender will allow an exception. If you don't qualify for a particular program, there may be another program that best fits your situation; your lender is there to help you work through this process and find the right loan for you.

The lender also commits, in writing, to making that loan if a purchase occurs within a set amount of time. In a pre-qualification, the customer provides the information, but the lender doesn't check it and there's no assurance that the loan will be approved.

Why is it important

During a pre-approval the mortgage company does all the work of a full-approval, except for the appraisal and title search. When you are pre-approved -- you become like a CASH BUYER and have more negotiating clout with the seller. In some cases (especially in multiple offer situations), having a pre-approval can make the difference between buying a home and not buying a home. In other instances home buyers have been able to save thousands of dollars as a result of being in a better negotiating situation.

Most good Realtors will not show you homes before being pre-approved because they do not want to waste your time, their time, and the seller's time.

Approval

Final approval is when you have found your home, it has been appraised, the title report has been received and everything has been found to be acceptable to the lender. Once you receive final approval, you're ready to close.

With pre-approval, the lender pulls a credit report, verifies a borrower's income and takes other preliminary underwriting steps to come up with a maximum allowable loan amount, which usually doesn't change.

Pre-approval requires the home-shopper to fill out a loan application and provide supporting pay stubs, bank statements, employment information and W-2 forms. Lenders charge for the service -- generally from $20 to $50 -- but it's worth it. Pre-approval puts you in the strongest possible bargaining position with sellers and their real estate agents. Those who are in a hurry to move a property often will accept a lower bid from a pre-approved buyer because they can be certain the deal will go through.

Fico Scores   (top)

A FICO® score is a most widely used credit score by creditors and lenders today. It is useful in directing applications to specific loan programs and to set levels of underwriting, i.e. streamline, traditional or second review. The FICO score is widely used because it are objective, consistent, accurate and fast. Your 3 digit FICO score will determine what interest rate you will pay on your credit cards, mortgages, and auto loans.

FICO scores were developed by Fair Isaac and Company, Inc. for each of the credit repositories. The scores are: (Equifax) Beacon, (Experian, formerly TRW) Experian/FICO and (TransUnion) Empirica. They are simply repository scores meaning they only consider the information contained in a person's credit file; they do not consider a persons income, savings or amount of a down payment for a mortgage.

Your score may be different at each of the three main credit reporting agencies. The FICO score from each credit reporting agency considers only the data in your credit report at that agency. If your current scores from the three credit reporting agencies are different, it's probably because the information those agencies have on you differs.

But no score says whether a specific individual will be a "good" or "bad" customer. While many lenders use FICO scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single "cutoff score" used by all lenders.

A FICO score is based on the information in your credit report located at that particular credit bureau. The actual scoring process is proprietary, and the algorithms are copyrighted. A score is determined by summarizing a number of factors in your credit report.

Information about the way you paid your credit accounts in the past, including late payments and bankruptcies.

FICO considers whether you have accounts in collection; whether you have any delinquencies,and how frequent and recent they are; and whether you make your payments on time. How much impact each item has on your score depends on what other information is in the report. For instance,one late payment may not affect your score significantly if the rest of your history is good,because the model looks at credit patterns,not isolated credit mistakes. In addition,FICO gives you points for maintaining a good payment relationship.

The amount of credit you are using, and the amount of credit still available.

FICO considers the number of balances recently reported, the average balance across all trade lines, and the relationship between the total balance and total credit limit. FICO considers your current level of borrowing and whether you are close to or over your limit. Carrying too much credit is held against you even if you do not have balances on those cards.

The number of months your credit accounts have been on your credit report.

FICO looks at how long you have had your account, the total number of inquiries and new accounts opened, the number of inquiries and new accounts opened in the last year,and the amount of time since the most recent inquiry. Banks,department stores,employers or landlords make "inquiries" on your credit report every time you apply for credit or a loan at that institution. The FICO scoring model considers inquiries because statistics show that those anticipating financial troubles try to increase the number of credit lines they have available. The FICO model has taken into account certain lender practices that normally would negatively affect your credit report. For instance,if you were interested in buying a car and the dealer agreed to finance you,the dealer may run credit inquiries on
various lenders,which would then show up as numerous inquiries on your credit report.

Beginning the first quarter of 1998, FICO models now treat all inquiries occurring within a 14-day period as one inquiry. In addition, all models will ignore all auto-and mortgage-related inquires that occur within a 30-day period before calculating your score.

What Types of Credit Do You Use?
FICO looks at the diversity of credit you use, whether you use bankcard, travel and entertainment cards, department store cards, personal finance company references,and/or installment loans.

Inquiries - The number of times you have applied for credit in the recent past.

Negative information in your credit report that could impact the FICO score includes bankruptcies,delinquencies or late payments on accounts, collections,
too many credit lines with maximum available funds borrowed, too little credit history (less than five credit lines in the past two years), and too many credit report inquiries.

FICO does not consider your race, color, religion, national origin, sex, sexual orientation, marital status or age.

What actual number is a good score depends on the scoring model, the type of loan,and the lender's acceptable risk level and credit policies. For some models like FICO, the higher the score, the better. For other models, the lower the score, the better. If the score on a borrower's credit report is too low for one
product,it may be acceptable for other products. Likewise, if one lender turns down a request for credit,it does not mean that another one will. For instance,an automobile dealer may accept a lower score than a creditor who offers an unsecured line of credit.

FICO scores range from about 350 to 850 points. With mortgage lenders, there is a pattern for acceptable FICO scores.

A score of 700 and up is considered excellent, and very basic underwriting or information beyond the score will be necessary to get a loan with the most favorable terms. If a borrower gets this score, he or she can get a loan for a mortgage in significantly less time.

Scores between 620 and 650 (average FICO scores fall into this range) indicate basically good credit, but also suggest to lenders that they should look at the potential borrower to assess any particular credit risks before extending a large loan or high credit limit. Lenders may require supplemental credit documentation and letters of explanation before an underwriting decision
is made. If a borrower has a score between these numbers, a mortgage decision will take approximately the same amount of processing time as it took before mortgage companies used FICO scoring.

Borrowers with a score below 620 may find themselves locked out of the best loan rates and terms offered by mortgage lenders, or may have to put up a higher down payment, such as 10 percent. The process will probably be lengthier and, as noted, the terms may be less appealing, but often credit can still be obtained.

Many lenders reserve their most favorable quotes of rates and fees for applicants in the upper FICO score ranges -- 700 and above. Mortgage applicants in the low 600s and below get progressively higher rate quotes and are charged higher loan fees. FICO scores, in other words, often determine what you pay for the money you borrow.

6 ways to slash mortgage costs   (top)

Ready to plunk down your hard-earned cash for a slice of the American pie? Make sure your financing is low fat.

Buying a home is likely the most expensive, long-ranging financial commitment most of us ever make. The more homework you do before heading out with a real estate agent or before making an offer on a home, the more likely you are to stretch your mortgage budget.

Here are six ways to get the most bang for your money beginning before you step out the door to shop.

Get pre-approved

Get pre-approved for your mortgage loan, rather than just pre-qualified.

With pre-approval, the lender pulls a credit report, verifies a borrower's income and takes other preliminary underwriting steps to come up with a maximum allowable loan amount, which usually doesn't change. The lender also commits, in writing, to making that loan if a purchase occurs within a set amount of time. In a pre-qualification, the customer provides the information, but the lender doesn't check it and there's no assurance that the loan will be approved.

Pre-approval requires the home-shopper to fill out a loan application and provide supporting pay stubs, bank statements, employment information and W-2 forms. Lenders charge for the service -- generally from $20 to $50 -- but it's worth it. Pre-approval puts you in the strongest possible bargaining position with sellers and their real estate agents. Those who are in a hurry to move a property often will accept a lower bid from a pre-approved buyer because they can be certain the deal will go through.

Check out ARMs

Short on cash? Consider an adjustable-rate mortgage. ARMs feature lower monthly payments at first, something that might help marginal buyers get into a home.

"When you see interest rates going up, a lot of the adjustable-rate mortgages actually become more affordable at that stage in the game," says Peter Goldberg, senior vice president of Ohio Savings Bank in Cleveland. "Ultimately people look for that lower payment and ARMs can really provide a lot of that."

Based on Bankrate.com's weekly national survey of lenders, the interest rates offered for ARMs tend to be about 1.5 to 2 percent lower than the average 30-year-fixed rate. Someone borrowing $150,000 on a one-year ARM at 5.47 percent would have monthly payments in the first year of $849. The same-sized loan with a 30-year fixed-rate mortgage at 7.01 percent would cost $999 a month.

Ready to find a mortgage? Check rates in your area.

 If the one-year ARM's annual adjustment is too volatile for your tastes, some relatively new adjustables offer initial fixed periods that endure longer. Consider a longer-term ARM, such as a 5/1 or 7/1 that features an initial fixed period of five years or seven years. You'll pay a little more in interest than for their one-year counterparts, but less than for a 30-year fixed-rate loan.

Float a balloon

Balloon loans are another option available to get a lower payment in the first few years. These mortgages charge less interest upfront for a set time frame, but require the borrower to either refinance at the end of that period, pay off the loan or convert it to a fixed payment schedule.

On a seven-year balloon loan, a borrower might make payments of principal and interest for that period of time. Assuming rates didn't shoot up more than 5 percent in the meantime, they might then be able to pay just $250 to roll the loan into a fixed schedule for the last 23 years.

Buy down the rate

If you've got the cash now and want to lower your payments, you can "buy down" your mortgage rate.

It's a simple concept, really: In exchange for more money upfront, lenders are willing to lower the interest rate they charge, cutting the borrower's payments.

Buydowns can be temporary or they can last the life of the loan. The purchaser can negotiate the deal directly with a lender, but sometimes a home seller arranges the buydown as an incentive to attract buyers.

Look for builder incentives

Those looking to buy a new home instead of a previously owned one may find that the builder will provide the incentives. Alan Cohen, a branch manager with Irwin Mortgage Corp. in Indianapolis, notes that companies in his market will sometimes offer a few thousand dollars to consumers to put toward their mortgages. Someone can use that money to buy down the loan rate for a couple of years.

"If you have a rate of 7.5 percent (on a 30-year fixed loan), you might find a buydown set up where the builder will actually allocate the points, say three points," Cohen says. A buyer could apply two points to the first year's payments and one to the second, resulting in a 5.5 percent interest rate the first year, 6.5 percent the second year and 7.5 percent all following years. "The lender will hold the funds like a tax and insurance account, and every month they will draw down the difference out of those funds like an escrow," he says.

That would help people who don't have much money now but expect to earn more later. Others who want to have a low rate for good can put the builder's money toward that end. Using the same loan parameters, for instance, somebody could buy the rate down about three-eighths to one-half of a percentage point for the entire 30 years, according to Cohen.

Trim closing costs

Of course, the mortgage rate isn't the only thing that determines how much financing will set you back. Closing costs add a significant chunk of change to the final bill, so borrowers should try to minimize them, too.

How? For starters, consumers shouldn't overshoot their budgets, according to Don Martin, a mortgage broker who owns Mayflower Capital in Los Altos, Calif. Because the cheapest lenders often have the most conservative underwriting standards, borrowers can end up paying less in origination fees by showing some restraint.

As an example, say a couple with $52,500 available for a down payment wants to buy a $150,000 home. They might be able to qualify for a loan with just $400 in origination fees because the broker's cheapest lender cuts deals for people who get mortgages for only 65 percent of their home values or less.

But if the same pair fell in love with a $240,000 home and refused to let it go, they would be getting a mortgage at about 78 percent loan-to-value. That's still conservative, yet maybe not enough so for the cheapest lender. The broker ends up having to find another company willing to provide the money, and that company might charge $650 in fees.

"So many people desperately need to pay top dollar for a house and that's where they get into trouble," Martin says. "The cheapest lenders won't work with them. The lower the rate that the lender has, usually those folks are real strict."

The same rule applies to other qualifying factors, such as debt-to-income ratio. A borrower who would only have to spend 28 percent of gross monthly income to get a mortgage should be able to obtain one more cheaply than a customer who would have to spend 35 percent or 40 percent.

Consumers have less control over the fees for other closing events because lenders and brokers negotiate them with various third-party providers. Somebody can't call up the lender's title insurance company, for example, and demand that it charge mortgage providers less for its services. But shoppers can take the Good Faith Estimate document, or GFE, that they receive during the loan application process and compare it with those from a couple of other companies. If a credit report costs $100 at one shop and $20 at another, but the second lender's deal is better overall, point out the discrepancy and ask the preferred company to lower its charge.

There are many details that you will need to know about a mortgage to avoid being a victim. The annual percentage rate (APR) of a mortgage is the interest rate including the cost of points and other fees.  These other fees include things like private mortgage insurance (PMI).  PMI is insurance that you are forced to take out by the bank if you are putting down less than a certain percentage (usually 20%) of the total purchase price.  This insurance protects the bank from losses in case you stop making your payments.  The bank must drop the PMI once you have built up more than 22% in equity.  Stay on top of this and make sure they drop it when they are supposed to.  If your property appreciates you effectively have more equity in your home.  If this happens you should ask your lender if they will drop the PMI requirement based on the new value.  In order for them to drop the PMI they will most likely require an appraisal which will cost you around $250.

Banks vs. Mortgage Brokers   (top)

Mortgage brokers are companies that sell mortgages for many different banks and lenders. They usually get a commission based on a flat fee or a percentage of the loan, paid by the lender. Brokers can be useful in quickly getting you a loan, because they represent many different types of mortgages, and one of them is bound to be ideal for your financial situation. Sometimes, the APR through brokers can be less expensive than going directly to the same bank yourself for financing, because in many cases the broker charges less for closing a loan than the bank's own internal salespeople.

Some great examples of online sites that are like a mortgage broker are LoanWeb and BestRate. What makes these sites so great is that they locate up to 4 banks that match your financial situation who are willing to write you a mortgage. It's a great way to get pre-approved without the credit check. They have a large database of lenders to ensure that most people will get an offer.

Pros:

You can get cheaper APR mortgages.
 

Sliding lock. If you lock in your APR through the broker, and the market interest rates drop, some brokers can get out of the lock and restart another lock for little or no extra fees. Many banks will not allow that type of practice when dealing directly with them. Some banks will allow you to re-lock, some will not, and some will charge a fee.
 

Can quickly find a loan that you would qualify for, whereas a bank might only have one or 2 loan types that you would not qualify for.

Cons:

They must courier papers back and forth to lenders, so postage charges can add up. It can be $200 in postage fees from one broker before your loan closes.

Many unscrupulous brokers out there who can steer you into the wrong mortgage. Just because you qualify quickly for a particular mortgage, does not mean it's the best mortgage for you to have. Some try to charge you fees, or put you into mortgages that don't allow early termination, or they have excessively high origination fees. These are issues you need to watch out for.

Where To Apply For Mortgages Online

Since your mortgage payment will most likely be your largest monthly expense for a LONG time, make sure to shop around and get the best deal possible.  Below is a list of reputable online sites where you can apply for a mortgage.  You should fill out the free application from each one and compare to see which gives you the best deal.  Maybe your local bank will have the best deal but you'll never know that a better deal was out there if you don't shop around.   Make sure that you get your credit report before applying for a mortgage, so that you can resolve any problems you find and increase your likelihood of getting approved.  Equifax now offers a credit report that includes your real Fair Issacs credit score which used to be hidden from you.  This score will really let you know how good (or bad) your credit is.  If your score is not as good as you had hoped, it is probably a good idea to get a merged credit report which has information reported by all 3 credit bureaus.

Don't be afraid about applying for a mortgage online.  Information transferred to secure sites is extremely safe and can not easily be intercepted by anybody so you should not be worried about information security.  You will find descriptions of some of the major online mortgage sites below.  Remember to get more than one quote so that you get the best deal and save the most money.

Most Common Mortgage Types   (top)

Fixed Rate Mortgage

With a fixed rate mortgage your interest rate is set prior to closing on your home and does not change for the entire term of the loan.   If you are approved far in advance of closing many banks will give you the opportunity to lock in the interest rate 2 - 3 months prior to closing.   Sometimes you may be able to lock further in advance for a fee, which is usually some percentage of a point.  A point is equal to 1% of the loan amount.  Locking early for a fee may be advantageous if rates are low and expected to rise. 

Pros Of Fixed Rate Mortgages:

You know what your monthly payment amount will be and it will not change. 

No worries about interest rate hikes that will raise your payments.

Cons Of Fixed Rate Mortgages:

Initial interest rate is higher than an adjustable rate mortgage.

If interest rates decline, it will not lower your payments.

If the interest rates decline significantly, you can refinance your mortgage to take advantage of the lower interest rate.  Refinance charges will be incurred, so the interest rate drop must be able to justify these costs.

You can get online quotes for fixed rate mortgages at LoanWeb, E-loan or BestRate.  Remember that a mortgage is an expense that will be with you for a long time.  If you are looking for a fixed rate mortgage you should apply at LoanWeb, E-loan and BestRate and see which one will give you the best deal.  A few dollars a month will really add up over 15 or 30 years.

Adjustable Rate Mortgage or ARM

With an Adjustable Rate Mortgage the interest rate will vary throughout the term of the loan.  How often the rate change depends upon the adjustment period of the loan. 

Pros Of Adjustable Rate Mortgages

Adjustable Rate Mortgages are initially priced at a lower mortgage rate than fixed interest rate mortgages. This will result in a lower initial payment.

The bank is willing to give a lower mortgage interest rate because it is "protected" from higher interest rates in the future.

Adjustable rate mortgages generally have a rate increase cap  (a cap is a maximum) per year and a lifetime cap on the interest rate. These are important details in an adjustable rate mortgage. It may be better to use an ARM when rates are up high, and they are less advantageous when rates are low. 

If you plan to be in a house for only 3-5 years, an ARM allows you to pay lower monthly payments for those 3-5 years than a fixed interest rate mortgage.

If interest rates drop, an ARM provides a way to participate in these lower rates without having to refinance your house. This can save you closing costs. 

The adjustment period is key to the loan. How often they adjust the payment is important because you want the longest adjustable period. Most decent ARMs have an adjustment period of one year, so your monthly payments remain the same for a year, then increase or decrease the next year.

Cons Of Adjustable Rate Mortgages

Interest rate hikes will increase the amount of your payments.

Since it is difficult to predict interest rates changes, it may be difficult to plan a adjustable rate mortgage payment into your budget.

If you have a cap over 2%, your monthly payments can go up significantly. Try to get the lowest cap you can.

Catch up clauses can come out of nowhere. If the cap was 3% and the rates rose 5%, they can invoke a "catch up" clause the following year, which can significantly increase your monthly payments.

Any time interest rates are adjustable, there is risk of volatility and increased monthly payments from the mortgage lenders. 

Avoid adjustable rate mortgages with negative amortization!

Be very weary of the word "discount" when looking at ARMs as this means that the loan will most likely have a shorter adjustment period which will lead to a higher cost in the long run.  This is similar to introductory rates on a credit card.

BE ASSURED THE RATES WILL RISE SHARPLY SOONER RATHER THAN LATER!!!

Just like fixed rate mortgages you should shop around for the best deal if you are interested in an adjustable rate mortgage.   You should get quotes from as many online sites like LoanWeb, E-loan or BestRate as possible.  When you compare the quotes make sure to pay close attention to the caps and other details that are unique to adjustable rate mortgages.

Other Mortgage Types   (top)

Balloon style Mortgage

A balloon style mortgage is a fixed rate mortgage. The interest rate on this type of mortgage is generally very low. Lower that the current going rate for a fixed rate mortgage. This interest and payment plan lasts a specified period of time, say 5 or 10 years. At that point the entire remaining amount of the mortgage becomes due in full. This type of mortgage is for people that plan on refinancing the mortgage before the balloon becomes due.

Pros Of Balloon Mortgages

Low interest rates, lower than the fixed rate mortgage.

Interest Rate doesn't change, until the balloon payment becomes due!

Cons Of Balloon Mortgages

You will be banking on refinancing. If interests go up to very high levels, or your financial situation changes, refinancing may not be possible.

Many people forget about the balloon payment coming up and are unprepared for it whent he time comes.

Reverse Mortgage

Be very careful with this type of mortgage! This is generally a type of loan that is used by elderly property owners who have their property paid off. It is a way to "unlock" the equity that they have built up in that property. A reverse mortgage is where the lender will pay you either a lump sum amount, or make monthly payments to you. The amount that you owe the lender increases over time, and no payment is due until the term of the loan is up. When the loan becomes due, the total amount paid to you, plus the interest on that amount becomes due in full. This lump sum payment is usually paid for by selling the property.

Pros Of A Reverse Mortgage

You can derive income from the equity of the property that you are living in.

Enhance the monthly income for retired people who plan on selling the property when (or even before) the loan term is up.

Monthly income derived from this type of mortgage is tax free.

Cons Of A Reverse Mortgage

If the value of the house decreases, you may be responsible for more debt than the house is worth.

The lump sum amount that is due when the loan term is up, is generally paid for by selling the property.

This is a very specialized type of mortgage and should not be entered into unless you know exactly what your doing!

No Document Mortgages (or Non Conforming Loans)

A no documentation mortgage is a mortgage which does not require any documentation of income,  verification from employers and does not require tax returns for a couple a years. If you can find a lender willing to give this type of loan, prepare to pay BIG interest rates.This is the loan of last resort!

Pros Of No Doc Loans

You can get a mortgage without the required documentation.

May be the only type of mortgage for some self employed individuals.

Cons Of No Doc Loans

Much higher interest rates!

You may have to put down a larger down payment amount (25%-30%) and pay more points at closing than other types of loans.

Seller Financing

Is usually in the form of a 2^nd mortgage and the seller is the lender on this 2^nd mortgage. Sometimes used in conjunction with a standard bank mortgage. Comes in handy For example when you need 20% to put down on a house and you only have 10%. The seller can finance the remaining 10%.

Pros Of Seller Financing

It's a great way to get a mortgage without a lengthy qualifying process, little or no fees, and possibly lower APR than traditional mortgages. 

By using seller financing to bring you over the 20% down payment level, you save money by not being required to purchase PMI.

Cons Of Seller Financing

You have to pay back the seller in 3-5 years, few will accept longer terms.

Some banks do not allow additional down payment dollars to come from family or other lenders.

The seller is 2nd in line if to get paid back if the house is foreclosed on.

Veterans Administration (VA) Mortgage
VA loans are insured by the Veterans Administration (VA). For more information about this government program visit the VA Home Loan site at http://www.homeloans.va.gov/

Pros Of VA Loans

If you qualify for VA mortgage, you may be able to get a larger loan for a larger percentage of the purchase price than with a conventional mortgage lender.

You can get a $0 down loan, and finance the entire amount of the purchase.

Cons Of VA Loans

There is extra paperwork and extra appraisal processing time associated with this type of loan.

In a good home selling market, where a seller mat expect several buyers, sellers may be reluctant to deal with purchasers that are using this type of financing.

If you are doing a VA (Veterans Administration) Approved Mortgage you need to have the following paperwork completed:

• A certified copy of your DD Form 214 "Certificate Of Release Or Discharge From Active Duty".
• Within about 3 weeks VA will send you Form 26-8329 (CG) "Certificate Of Eligibility For Loan Guaranty Benefits.

Federal Housing Administration (FHA) Mortgages
HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD plays a large role in home ownership by making loans available for lower and moderate income families through its FHA mortgage insurance program and its HUD Homes program. HUD owns homes in many communities throughout the U.S. and offers them for sale at attractive prices and economical terms. Mortgages are insured by the Federal Housing Administration. For information on FHA loan and other Housing and Urban Development (HUD) programs visit the HUD web site at http://www.hud.gov/

Pros Of FHA Loans
For those that qualify for FHA mortgage, you may be able finance a  larger percentage of the purchase price than with a conventional mortgage lender.

Cons Of FHA Loans
There is extra paperwork and extra appraisal processing time associated with this type of loan. In a good home selling market, where a seller mat expect several buyers, sellers may be reluctant to deal with purchasers that are using this type of financing.

Other mortgage payment items:   (top)

Personal Mortgage Insurance (PMI)
20% down/equity and you don't have to pay this worthless expense!  PMI is insurance that you are forced to take out by the bank if you are putting down less than a certain percentage (usually 20%) of the total purchase price.  This insurance protects the bank from losses in case you stop making your payments.  The bank must drop the PMI once you have built up more than 22% in equity.  Stay on top of this and make sure they drop it when they are supposed to.  If your property appreciates you effectively have more equity in your home.  If this happens you should ask your lender if they will drop the PMI requirement based on the new value.  In order for them to drop the PMI they will most likely require an appraisal which will cost you around $250.

Tax Escrow
20% down/equity and you can pay your own taxes. This means that if you put down at least 20% or have built up 20% in equity the bank will usually let you hold the tax money in an interest bearing account until the taxes are due!

Insurance (Homeowners and Flood)
Most banks require you to keep homeowners insurance and flood insurance in escrow to protect their investment.  This way they always know that you have the insurance to protect the property that they are lending you money on. A good place to get online insurance quotes is InsureConnection.

Jumbo Loans
Loans that are in excess of an amount set by the Federal National Mortgage Association. This amount is presently set at $252,700 for a single-family home, or $323,400 for a two-family home in the continental US, in Hawaii and Alaska, the amount is $379,050 for a single-family home or $485,100 for a two-family home.  Most commercial lenders agree to use these guidelines, which are set by the Federal National Mortgage Association (Fannie Mae). Jumbo loans have higher interest rates and fewer financing options, and are also called non-conforming loans.

Some other definitions

Mortgage Term
The "term" or length to the mortgage is an important factor that must be considered when looking for a mortgage. Mortgages are generally 15, 20 and 30 years. Generally the shorter the term of the mortgage, the lower the interest rate will be. This is because the bank has less exposure to interest rate increases in the future. The shorter the term, the less chance of interest increases. The shorter terms mortgages will save you a large amount of money in interest payments. If you can not afford a shorter term mortgage, a large amount of interest and monthly payments can be saved by making extra payments towards the loan principle.

Points on a Mortgage   (top)

Points are an up-front fee paid to the lender at the time that you get your loan. Each point equals one percent of your total loan amount. Points and interest rates are inherently connected: in general, the more points you pay, the lower the interest rate you get. However, the more points you pay, the more cash you need up front since points are paid in cash at closing.

The more points (a point is equal to 1% of the mortgage amount) you are willing to pay, the lower the interest rate on the mortgage will be. So a basic decision needs to be made here, pay the points ($$$$) up front and save on the interest on the mortgage later, or save the money now and pay the higher interest rate as you go.

Below is an example of two mortgages. The first mortgage is a no points mortgage and the second mortgage has points paid up front. Note: in some cases the points can be "put back into" the mortgage, thus increasing the amount of the mortgage by the mount of the points paid on the mortgage.

* Monthly Payment includes Principle and Interest.

In the example above, the payment of 2 points, equivalent to $3,000.00  on the $150,000.00 mortgage lowered the monthly payment by $25.05 and saved a total of $9,025.58 in interest over the life of the mortgage.

On the third row in the table the $3,000.00 in points were put back into the mortgage, increasing the mortgage amount   $150,000.00 to $153,000.00 The monthly payments decrease from $997.95 to $992.36 a savings of  $5.59, while the interest over the life of the loan went down from $209,266.34 to $204,243.90 a savings of $5,022.34 in this case.

Bottom Line:  Look Beyond The APR
Don't just look at the APR of a mortgage loan.  The example above clearly shows how important it is to take into account the points on a home mortgage loan.  Depending on your situation, it can be better for you to pay points in order to get a lower APR.

How do you make the decision?

How long do you plan on staying in the house?
If you plan on staying in the house only a short period of time, the lower initial cost of less points or even no points would be the way to go. However, if you are planning to stay in the house for a longer period of time, a large amount of money can be saved by paying the points up front and saving on lower interest later.

Do you have the money to pay for the higher amount of points?
If you plan on staying in the house a long period of time, and you have the money to pay the points up front, it may be a good idea to pay the point(s) and save the interest. This can be a considerable amount of money over the life of the loan.

Does the point fee lower the APR enough?
If you plan on staying in the house a long period time and have the money to pay the points up front, the next question to ask is, Does paying the points to get a lower interest rate, lower the interest rate enough? This depends on how long you will stay in the house and how much a point will lower the interest rate. Generally a point will lower your interest rate by about 1/8 - 1/4 of a percent on a 30 year fixed rate mortgage and 1/4 - 1/2 a percent on a 15 year fix rate mortgage.

Points can be put back into the mortgage.
You may be able to "put the points into the mortgage". This means that the dollar amount of the points are added into the mortgage amount. One point on a $100,000.00 is equal to $1,000.00  So if you were getting a $100,000.00 mortgage with a 1 point fee put back into the mortgage, the new mortgage amount would be $101,000.00.

LoanWeb and BestRate will give you up to 4 mortgage quotes free when you fill out their easy online application. Always check the numbers on the various offers that they come back with. Carefully review these numbers to determine which combination of  points and interest rate best satisfies your needs.