Frequently
Asked Questions

What is a lock?

A lock in guarantees a certain interest rate for a certain period of time.

Back To Top

What are closing costs?

Closing costs are expenses incurred by buyers and sellers in transferring ownership of a property.

Back To Top

What is the difference between being prequalified and preapproved for a loan?

If you’re prequalified it means that you POTENTIALLY could get a loan for the amount stated to you, assuming that all of the information you provide to the bank is accurate and true. This is not as strong as a preapproval.

If you’re preapproved, it means that you have undergone the extensive financial background check, which includes looking at your credit history, previous tax returns and verifying your employment – and the lender is willing to give you a loan, basically meaning you’re approved!

You will usually be provided an accurate figure which shows the maximum amount that you are approved for. Most sellers prefer buyers that have been preapproved because they know that there will not be any problems with the purchase of their home.

Back To Top

What is title and what do they do?

The goal of a title search is to assure you and your lender that the seller is the legal owner of the property and that there are no outstanding claims or liens against the property that you are buying. The title search may be performed by a title company, an escrow company, a lawyer or other specialists.

Back To Top

What does title insurance cover?

Most lenders require a title insurance policy to protect the lender against an error in the results of the title search. If a problem arises, the insurance covers the lender’s investment in your mortgage. The cost of the policy (a one-time premium) is usually based on the loan amount and is often paid by the buyer. However, you may negotiate with the seller to pay all or part of the premium. The title insurance required by the lender protects only the lender. To protect yourself against title problems, you may want to buy an “owner’s” title insurance policy. Normally the additional premium cost is based on the cost of the lender’s policy, but it can vary based on your locale.

Back To Top

What are impounds?

A trust like account established by lenders for the accumulation of funds to meet taxes, FHA mortgage insurance premiums, and/or future insurance policy premiums required to protect their security.  Impounds are usually collected with the note payment.

Back To Top

What is an escrow account (aka impounds)?

When borrowers make their monthly mortgage payments, they generally also pay one-twelfth of the anticipated annual amount needed to pay taxes and insurance premiums. These additional funds are deposited into an escrow account until the lender pays the taxes and insurance premiums as they come due. The borrower benefits for budgeting reasons because costs are spread through the year rather than as a lump sum. This method allows the lender greater control in avoiding tax delinquencies or lapses of hazard insurance coverage on the property. Mortgage documents often stipulate lenders that establish an escrow account.

Back To Top

Are lenders limited in the amount of escrow funds they can collect from borrowers?

The Real Estate Settlement Procedures Act (RESPA) sets standards for the calculation of the amount mortgage lenders require borrowers to deposit into the escrow account. RESPA limits the initial deposit into an escrow account to an amount equal to the sum sufficient to pay taxes, insurance premiums, and other charges on the mortgaged property for the first payment period, plus a cushion.

An escrow cushion is an amount of money held in the escrow account to prevent the account from being overdrawn when increases in disbursements occur.

On a monthly basis, mortgage lenders may not require borrowers to pay more than one-twelfth of the total amount of the estimated annual taxes, insurance premiums, and other charges, plus an amount necessary to maintain the allowable cushion.

Back To Top

What is PITI and what does it stand for?

PITI is the total monthly payment you make on a house-Principal, Interest, Taxes, and Insurance.

Back To Top

Can I pay my own taxes and insurance?

When a loan is originated, the mortgage documents specify the escrow conditions. This has become a standard practice for all mortgages, including FHA, VA and conventional mortgages. Occasionally on conventional loans, FRFCU waives the collection of escrow requirement at closing if the member has a minimum 20% equity position in the property.

Back To Top

How is interest calculated on a mortgage loan?

Most mortgages originated today calculate interest in arrears, unlike consumer loans which calculate interest to the date of payment receipt. As an example, when borrowers pay their February mortgage payments, they are paying the January interest. This method of calculating interest is based on a 360 day year in which each month has 30 days.

Back To Top

How long does the loan process take?

The number of days from application to closing can vary from just a few days to 45 or more days, depending on a number of factors. Some of the factors include: loan type, whether an appraisal is needed, and title clearance. Time delays also occur if outside sources or the borrowers do not promptly provide documents to the lender.

Back To Top

How much time will it take to sign the loan documents?

Generally, the process takes as long or short as the borrower wishes. Explaining and signing the documents takes approximately 30 to 45 minutes. However, the borrower may choose to sign the documents and be on his/her way or ask a number of questions and spend more time.

Back To Top

What does Prepaid Interest mean?

Prepaid interest is typically paid at loan closing. It is the interest paid on a new loan from the day of closing through the end of the month. All future interest on a mortgage loan is then paid in arrears. For example, if your new loan closes on February 19th, prepaid interest would be paid at closing from February 19th through the end of the month of February. Interest would then be paid monthly with your first payment beginning April 1st which would pay March interest. Your payment on May 1st would pay April interest, etc.

Back To Top

What does the origination fee cover?

The origination fee is the fee some lenders charge to cover some of the costs of making the loan and is calculated by multiplying the total mortgage loan amount by the percentage shown. This fee is typically 1% or lower, but may also be influenced by market conditions or the type of loan being sought.

Back To Top

What is a gift letter?

A gift letter is when an individual gives you money for a down payment as a gift, that person must write you a gift letter so that it can be included in your loan documentation.

Back To Top

What is underwriting?

Underwriting is the process of evaluating a loan to determine whether the loan is a good risk.

Back To Top

Why did my mortgage payment amount change?

There may be several reasons. Some mortgages, such as ARM loans, provide for periodic adjustments to your principal and interest payment amount. A second reason for a change may be due to an annual analysis of your escrow account. In compliance with the Real Estate Settlement Procedures Act (RESPA), you will receive an Annual Escrow Disclosure Statement, which shows the adjustment to your escrow payment based on current tax and insurance amounts.

Back To Top

Why does the title have to be cleared before I can get a mortgage?

When a lender makes a mortgage loan (other than a home equity loan), the lender typically requires a first lien position. This means there can be no other outstanding liens against the property that are superior to the new mortgage. Liens can result from a variety of sources, such as home equity loans or lines of credit, child support judgments, divorce settlements, delinquent taxes, and special assessments. Most realtors, mortgage companies, title companies, and escrow companies will assist the seller and/or borrower in clearing title. The ultimate responsibility, however, lies with the sellers of the property who are warranting clear title to the buyers. It is important the buyers receive clear title from the sellers so there are no future claims against their property ownership rights.

Back To Top

What is FHA Mortgage Insurance (also known as Private Mortgage Insurance)?

FHA mortgage insurance protects lenders in case of a default by the borrower of the FHA loan. An FHA mortgage helps reduces the cash needed to purchase a home. The FHA is funded solely from the income it creates: from the revenue generated by FHA mortgage insurance. This FHA mortgage insurance cost is borne by the homebuyer, but it ends approximately five years later or when the FHA mortgage balance is seventy-eight percent of the property value, whichever occurs last.

Source: http://www.fha.com/hud-fha-16.cfm

Back To Top

What benefits do I receive from private mortgage insurance?

Prior to the existence of private mortgage insurance, individuals typically could not purchase a home unless they had a down payment of at least 20% of the purchase price. Private mortgage insurance benefits the mortgage lender directly by reducing the costs associated with borrower default. It also benefits consumers by lowering down payments, thereby allowing more people to achieve home ownership.

Back To Top

What items do I need to take when I sign loan documents?

Once your loan is approved, you will set up an appointment to sign loan documents in the presence of a notary public.

Below is a list of items you will need in preparation for the appointment to sign escrow papers:

  • Identification One of the following forms of identification must be presented at the signing of escrow in order for the signature to be notarized: a current driver’s license, passport, State of California Department of Motor Vehicles ID card.
  • Cashier’s Check — You need a cashier’s check or a certified check issued by a California (or your state) or your financial institution made payable to the title company. If using a personal check, the title company may delay the closing until the check has cleared.
  • Fire and Hazard Insurance You must have fire and hazard insurance in place before the lender will send the money to fund the loan. Whenever you buy a home, you must have insurance. Provide your escrow officer with the insurance agent’s name and contact information so they can make sure that the policy complies with your lender’s requirements

Back To Top

Resources

Back To Top