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Fannie Mae and Freddie Mac are large companies that guarantee most of the mortgages made in the U.S. Together, they are also known as the government sponsored enterprises (GSEs). Historically, they were private companies operating with government permission and under government regulation. In late 2008, following the financial crisis, the U.S. government took over operations at both companies.
Loan guarantees from Fannie Mae and Freddie Mac reduce risk for lenders who make loans and investors who might purchase them. This makes loans more affordable and contributes to the availability of 30-year fixed-rate loans. Loans that are not eligible for Fannie Mae or Freddie Mac guarantees are typically more expensive.
Loans guaranteed by the GSEs are known as conventional loans. To qualify, these loans must meet certain criteria. Some requirements are established by government regulation (for example, maximum loan amounts), while others are set by the companies.
A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. If you have a prepayment penalty, you would have agreed to this when you closed on your home. Not all mortgages have a prepayment penalty.
Typically, a prepayment penalty only applies if you pay off the entire mortgage balance – for example, because you sold your home or are refinancing your mortgage – within a specific number of years (usually three or five years). In some cases, a prepayment penalty could apply if you pay off a large amount of your mortgage all at once. Prepayment penalties do not normally apply if you pay extra principal on your mortgage in small chunks at a time–but it’s always a good idea to double check with the lender.
The credit check is reported to the credit reporting agencies as an “inquiry.”
Inquiries tell other creditors that you are thinking of taking on new debt. An inquiry typically has a small, but negative, impact on your credit score. Inquiries are a necessary part of applying for a mortgage, so you can’t avoid them altogether. But it pays to be smart about them. As a general rule, apply for credit only when you need it. Applying for a credit card, car loan, or other type of loan also results in an inquiry that can lower your score, so try to avoid applying for these other types of credit right before getting a mortgage or during the mortgage process.
You can shop around for a mortgage and it will not hurt your credit. Within a 45-day window, multiple credit checks from mortgage lenders are recorded on your credit report as a single inquiry. This is because other creditors realize that you are only going to buy one home. You can shop around and get multiple preapprovals and official Loan Estimates. The impact on your credit is the same no matter how many lenders you consult, as long as the last credit check is within 45 days of the first credit check. Even if a lender needs to check your credit after the 45-day window is over, shopping around is usually still worth it. The impact of an additional inquiry is small, while shopping around for the best deal can save you a lot of money in the long run. Note: the 45-day rule applies only to credit checks from mortgage lenders or brokers – credit card and other inquiries are handled separately.
Adjustable rate mortgages can be very complicated. There are many parts to an adjustable rate mortgage that can affect how much the mortgage will cost you. If you are considering an ARM, make sure to read the terms carefully and ask lots of questions until you understand exactly how each of these features of the mortgage works.
Here are key questions to ask your lender about your loan:
Most adjustable-rate mortgages have fixed interest rates for an initial period – for example, 3 or 5 years – and are typically re-calculated once per year after that. But this structure is not required. Some loans don’t have an initial fixed-rate period, and they can adjust more or less frequently. Make sure you understand exactly how often the rate on your loan will re-adjust.
The index and margin control what your interest rate will be at each adjustment for an adjustable-rate mortgage. Learn more about indexes and margins and how they work.
Make sure you’re prepared for each step of the closing. Follow the steps below, and download the Consumer Financial Protection Bureau’s closing checklist.
Before the closing:
During the closing:
Review the documents for accuracy and ask any questions you have.
Learn more about what to expect during the closing.
After the closing:
The “total of payments” is found on page 5 of the Closing Disclosure form in the “Loan Calculations” section. This number tells you the total amount of money you will have paid over the life of your mortgage. This total includes principal, interest, mortgage insurance (if applicable), and loan costs. It assumes that you make each monthly payment as agreed – no more and no less – until the end of the loan.
The Loan Estimate is a new form that goes into effect on October 3, 2015.
Beginning October 3, 2015, loan officers are required to provide you with a Loan Estimate once you have provided:
Your loan officer cannot require you to provide documents verifying this information before providing you with a Loan Estimate.
You can choose to give more information. The more information you can provide the loan officer about your financial situation, such as debts and nonwage income sources, the more accurate the information on your Loan Estimate is likely to be. Your Loan Estimate will also be more useful for you if you tell the loan officer what kind of loan you are interested in. You may want to let your loan officer know whether you are interested in:
A “piggyback” second mortgage is a home equity loan or home equity line of credit (HELOC) that is made at the same time as your main mortgage. Its purpose is to allow borrowers with low down payment savings to borrow additional money in order to qualify for a main mortgage without paying for private mortgage insurance.
Typically, borrowers with a down payment less than 20 percent of the home’s price will need to pay for mortgage insurance. For example, a borrower that can afford a 10 percent down payment would typically pay for the first 10 percent of the home’s price with their down payment, and the remaining 90 percent of the price with a mortgage that requires mortgage insurance.
When using a “piggyback” mortgage, lenders structure the loans differently. For example, the same borrower might pay for the home with: a 10 percent down payment, 80 percent main mortgage, and a 10 percent “piggyback” second mortgage. In this scenario, the borrower is still borrowing 90 percent of the value of the home, but the main mortgage is only 80 percent. The “piggyback” second mortgage typically carries a higher interest rate, which is also often adjustable. These programs are offered under a variety of lender-specific brand names, but follow the same basic structure.
The “piggyback” structure was common during the mortgage boom in the early to mid-2000s. It is rare today, but could return. Under the rules during the mortgage boom, borrowers did not have to pay for mortgage insurance with an 80 percent main mortgage.
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get.
Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance also is typically required on FHA and USDA loans. Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. But, it increases the cost of your loan. If you are required to pay mortgage insurance, it will be included in your total monthly payment that you make to your lender, your costs at closing, or both.
Mortgage insurance, no matter what kind, protects the lender – not you – in the event that you fall behind on your payments. If you fall behind, your credit score may suffer and you can lose your home through foreclosure.
There are several different kinds of loans available to borrowers with low down payments. Depending on what kind of loan you get, you’ll pay for mortgage insurance in different ways:
If you get a conventional loan, your lender may arrange for mortgage insurance with a private company. Private mortgage insurance (PMI) rates vary by down payment amount and credit score but are generally cheaper than FHA rates for borrowers with good credit. Most private mortgage insurance is paid monthly, with little or no initial payment required at closing. Under certain circumstances, you can cancel your PMI.
If you get a Federal Housing Administration (FHA) loan, your mortgage insurance premiums are paid to the Federal Housing Administration (FHA). FHA mortgage insurance is required for all FHA loans. It costs the same no matter your credit score, with only a slight increase in price for down payments less than five percent. FHA mortgage insurance includes both an upfront cost, paid as part of your closing costs, and a monthly cost, included in your monthly payment.
If you don’t have enough cash on hand to pay the upfront fee, you are allowed to roll the fee into your mortgage instead of paying it out of pocket. If you do this, your loan amount and the overall cost of your loan will increase.
If you get a US Department of Agriculture (USDA) loan, the program is similar to the Federal Housing Administration, but typically cheaper. You’ll pay for the insurance both at closing and as part of your monthly payment. Like with FHA loans, you can roll the upfront portion of the insurance premium into your mortgage instead of paying it out of pocket, but doing so increases both your loan amount and your overall costs.
If you get a Department of Veterans’ Affairs (VA)-backed loan, the VA guarantee replaces mortgage insurance, and functions similarly. With VA-backed loans, which are loans intended to help servicemembers, veterans, and their families, there is no monthly mortgage insurance premium. However, you will pay an upfront “funding fee.” The amount of that fee varies based on:
Like with FHA and USDA loans, you can roll the upfront fee into your mortgage instead of paying it out of pocket, but doing so increases both your loan amount and your overall costs.
The difference between your principal and interest payment and your total monthly payment is that your total monthly payment usually includes additional costs like homeowners insurance, taxes, and possibly mortgage insurance.
The principal and interest payment on a mortgage is probably the main component of your monthly mortgage payment. The principal is the amount you borrowed and have to pay back, and interest is what the lender charges for lending you the money.
For most borrowers, the total monthly payment you send to your mortgage company includes other things, such as homeowners insurance and taxes that may be held in an escrow account. If you have an escrow account, you pay a set amount with every mortgage payment for these expenses. Your mortgage company typically holds the money in the escrow account until those insurance and tax bills are due, and then pays them on your behalf. If your loan requires other types of insurance like private mortgage insurance, these premiums may also be included in your total mortgage payment as well.
Here’s how it works:
The amount financed is shown on page 5 of your Closing Disclosure under “Loan Calculations.” It shows the amount of money you are borrowing from the lender, minus most of the upfront fees the lender is charging you. For example, if you have a $100,000 loan, but the lender is charging you $4,000 in certain types of fees in order to get the loan, the “amount financed” would be $96,000.
Yes, if the payments are likely to be consistently made. A creditor such as a lender or broker can consider the amount of such income and likelihood that it will continue, as with all other forms of income. In determining this, a lender or broker may consider factors such as whether there is a written agreement or court decree, how long and how regularly you have been receiving payments, and the creditworthiness of the payor when that information is available.
When you are buying a home you generally pay all of the costs associated with that transaction. However, depending on the contract or State law, the seller may end up paying for some of these costs.
Even if you don’t pay the mortgage closing fees directly out of pocket, you might end up paying them indirectly. Sometimes, you can negotiate with the seller for a “credit” towards your closing costs, but the seller will usually require you to pay a higher price for the home in order to cover the costs of this credit.
You’re still paying for these costs—they are just paid through your loan instead of paid out of pocket. The lender may also offer to give you a credit to help with your closing costs. This credit isn’t free either. Typically, the lender will either increase your loan amount to cover these costs, or charge you a higher interest rate in exchange for the credit.
Common closing fees or charges may include:
Your credit score, as well as the information on your credit report, are key ingredients in determining whether you’ll be able to get a mortgage, and the rate you’ll pay.
Your credit report and your credit score are two different things. Your credit score is calculated based on the information in your credit report. Higher scores reflect a better credit history and make you eligible for lower interest rates.
You have many different credit scores, and there are many ways to get a credit score. However, most mortgage lenders use FICO scores. Your score can differ depending on which credit reporting agency is used. Most mortgage lenders look at scores from all three major credit reporting agencies – Equifax, Experian, and TransUnion – and use the middle score for deciding what rate to offer you.
Errors on your credit report can reduce your score artificially – which could mean a higher interest rate and less money in your pocket – so it is important to check your credit report and correct any errors well before you apply for a loan.
Your credit score is only one component of your mortgage lender’s decision, but it’s an important one.
Other factors include:
The Loan Estimate is a new form that goes into effect on October 3, 2015.
The only fee a lender can ask you to pay prior to providing a Loan Estimate is a fee for obtaining your credit report. Credit report fees are typically less than $30.
A lender cannot collect any other fees before providing you with a Loan Estimate. In fact, a lender must wait until you indicate that you’d like to proceed with the loan application before charging you any other fees. Until that time, a lender also cannot collect your credit card number or require you to provide a check for anything other than a reasonable fee to obtain your credit report.
Once you receive a Loan Estimate, it’s up to you to decide whether you want to proceed with that particular lender and that particular loan application. If you have received your Loan Estimate and you tell the lender that you want to proceed, then the lender can charge you additional fees. For example, lenders commonly charge an application fee or an appraisal fee after you decide to proceed with the loan application.
It is possible to qualify for a mortgage after a foreclosure. However, foreclosure will hurt your credit.
Foreclosure information generally remains in your credit report for seven years from the date of the foreclosure. Even if you have a bad credit history or a low credit score, you may qualify for an Federal Housing Administration (FHA) loan. You may also qualify for a subprime mortgage, but note that subprime mortgages may have much higher interest rates than most other mortgages. Carefully consider the costs and risks of the loan that you are offered, and weigh the costs of the loan you might be able to get now against the option to wait and build up your credit history before buying a home.