Q: Are low down payment options available for buyers who can’t afford a 20% down payment?
A: Although loans were widely available to people putting less than 20% down during the real estate boom of the late 1990s and early 2000s, lenders have since become much more cautious. Even if you can afford high monthly mortgage payments and have a high credit score, you may have trouble finding loans requiring as little as 5% to 15% down – and the loan you find will likely require you to pay a much higher interest rate and more points than if you’d made a larger down payment.
The exception are FHA-insured loans, which make provision for buyers with lower than optimal credit scores and unable to make down payments. More and more homebuyers are using these – but you need to meet separate qualification criteria. See an experienced mortgage broker for help.
Also, if you put down less than 20% or use an FHA-backed loan, you will likely have to pay for mortgage insurance (MI).
Q: Can I borrow the funds for the down payment?
A: Yes. It is possible to borrow against an asset that you currently own for the down payment. For example you can borrow against your 401(K), assuming that your company plan permits it, and you could also borrow against your current residence to purchase a new one (i.e. a bridge loan or an equity line). You may also borrow against your fully invested stock portfolio, avoiding the tax consequences of selling prematurely.
Q: Does it make sense to pay more points for a lower interest rate?
A: Whether to pay an upfront fee known as “points” in order to lower your mortgage interest rate can be a tough decision – there you are, making one of the largest purchases of your life, and you have to come up with a few more thousand dollars by the closing. However, over time the savings in interest payments can be well worth that initial financial stretch.
One point is 1% of the loan principal; for example, if you were borrowing $250,000 at two points, you’d pay $5,000 up front. There is normally a direct relationship between the number of points lenders charge and the interest rates they quote for the same type of mortgage, such as a fixed rate. The more points you pay, the lower your rate of interest, and vice versa.
Before deciding whether it’s worth paying points, factor in how long you plan to own your house. The longer you live there (or pay down the mortgage), the better off you’ll be paying more points up front in return for a lower interest rate. You’ll reach a break-even point, when you’ve worked off what you spent on the upfront payment via your monthly savings. On the other hand, if you think you’ll sell or refinance your house within two or three years, it’s a better idea to get a loan with as few points as possible, since you’re unlikely to reach that break-even point.
A good loan officer or loan broker can walk you through all your options and trade-offs such as higher fees or points for a lower interest rate.
Q: How can I avoid having to get mortgage insurance on my loan?
A: Many borrowers who have less than a 20% down payment, choose a combination first and second mortgage (referred to as a piggyback loan) to avoid mortgage insurance (MI). The most common method of financing without MI is an 80-10-10 (an 80% 1st mortgage, 10% 2nd mortgage & a 10% borrower down payment). Also available is an 80-15-5 (requiring an 80% 1st mortgage, 15% 2nd mortgage & a 5% borrower down payment). Due to market crisis, it is not easy to find a lender to carry a second loan with CLTV (combine loan to value ratio) over 80%.
Q: How can I find a qualified, reputable CPA to advise me?
A: There are always the “big five” accounting firms to rely on and referrals from family and friends are also advisable. The California Board of Accountancy (CBA) website provides License Lookup and Disciplinary Actions. For other states, CPAverify lists the licensing data from participating states.
Q: How do I find out information about local neighborhood schools?
A: If you are working with a real estate agent, your agent should have information on the school test scores in your selected area. You may also contact the neighborhood schools directly for information. Comprehensive online resources for school information are at Great! SCHOOLS.org.
Q: How do I hold title? What are the pros and cons for each title investing?
A: See The Advantages and Limitations of How You Take Title to Real Property (PDF) and Joint Tenants vs. Community Property (PDF)).
Q: How do I know if it makes sense for me to refinance?
A: First determine your financial mortgage related goals: i.e. are you looking to improve your monthly cash flow, reduce your mortgage term, do you need to take out cash utilizing the equity from your home? Obtaining the right mortgage for your particular needs could make sense even when rates are not at their lowest levels. First identify your goal and contact a mortgage professional for suggestions on mortgage programs that would best help you meet your objectives. Then shop for rates after you have selected the appropriate mortgage program.
Q: How do I know if my rate will reset?
A: If you hold an adjustable-rate mortgage, or ARM, your rate will reset by definition on one or more “change dates,” with the largest hike coming at the end of an introductory or “teaser” rate period of anywhere between one month and 10 years. For instance, a 3/1 ARM will reset after the first three years, a 5/1 ARM after the first five years and so on.
Q: How long does it take to get pre-qualified or pre-approved for a loan?
A: Loan pre-qualification can occur in a matter of minutes, in the time required to communicate your financial circumstances to a lending professional so they can crunch the numbers. Loan pre-approval could involve more time up to 1-3 days to gather the applicant’s income, asset and credit documentation and to have an underwriter review it. Whether you are requesting a pre-qualification or pre-approval, ask for it in writing. Both your real estate agent and a potential seller will want a letter from your lender.
Q: How much Homeowner’s insurance coverage will I need to close the new mortgage?
A: A safe bet is to buy a guaranteed-replacement-cost policy that will generally pay out 20-50% more than the face value of the policy to rebuild your home (this is also the preferred policy of lenders). A replacement-cost policy typically adjusts the amount of insurance each year to keep pace with rising construction costs in your area. It is important to note that local building codes require structures to be built to specific standards which could vary over time, if your home is severely damaged, you may be required to rebuild it to current codes. Even guaranteed-replacement-cost polices do not always cover this expense. However, many insurers offer an endorsement that will pay for the upgrading cost, it is a good idea to consider adding such an endorsement to your replacement-cost policy.
Q: How much will my rate reset?
A: The amount of your rate reset as defined by your mortgage contract is a factor of three components – the index, the margin and the limit, or “cap.”
The index, as its name implies, is based on the interest rate or bond yields in other markets. Typical indexes used in ARMs include a handful of acronyms: COFI (cost of funds index, based on Western U.S. banks), MTA (monthly Treasury average of one-year Treasury bills), LIBOR (London Interbank Offered Rate, the wholesale bank money market rate in London) and CMT (constant maturity Treasury bill average).
The margin is an additional percentage that your mortgage company charges for its service.
The cap places limits on the maximum percentage your mortgage rate can be raised in a given period. Typically, an ARM will limit the initial reset, subsequent annual resets (periodic cap) and the maximum (lifetime cap) increase for the term of the loan.
When your mortgage “change date” arrives, your rate will adjust to the index interest rate on that day, plus an additional margin percentage as specified in your mortgage.
For instance, let’s say you have a 3/1 ARM at an introductory rate of 5 percent. The index interest rate on your mortgage has risen to 7.5 percent after three years and the margin rate in your contract is 1.5 percent. Starting in the fourth year, your 5 percent ARM would reset to 7.5 percent with a 1.5 percent margin, for a new mortgage rate of 9 percent.
Q: I already own a home and I am looking to move up, do I need to sell or list my current home prior to making an offer on a new property?
A: In the current seller’s real estate market, many buyers searching for property do not have the luxury of making an offer contingent upon the sale of their current residence. The solution may be either equity or bridge financing for those buyers who need the sale proceeds from their home in order to buy a new residence. These loans would be secured against their existing residence and would provide interim financing for the new residence until the property is actually sold. If a buyer does not need the equity from their current residence in order to purchase a new residence and they can qualify for a new loan carrying both the mortgages on the existing and the new residence, they could elect not to sell their existing residence or could choose to rent it.
Q: I am a first time buyer, what is the best way to get started looking for a home?
A: The first step a potential buyer should take is to get pre-approved by a lender so that you know how much you can afford to purchase before starting to actually look at property. After pre-approval, the next step would be to locate a real estate agent or reliable internet resource that can help you determine where and what you would like to buy.
Q: I am purchasing a condo (or townhouse or PUD) and I am aware that the HOA is currently in litigation with the developer, will I be able to obtain financing in the development?
A: A Homeowner’s Association could leave itself open for legal action if it doesn’t act on legitimate building defects or disclose these defects to prospective buyers. However the fact that an association is suing a developer can impact a potential buyer’s ability to obtain financing. It is vital to let your lender know up front if the development or project you are making an offer on is in litigation. It is usually possible to obtain financing in such situations, but it will limit the number of lenders who might be able to finance your purchase. In some cases the lender may require a larger down payment and the interest rate could exceed that of standard financing programs.
Q: If I get mortgage insurance, how can I eliminate it?
A: In July of 1999, legislation became effective which requires mortgage insurance (MI) companies to terminate their borrower paid insurance policies once a borrower’s loan balance reaches 78% of the original property value for a conventional loan(there are exceptions to this law, i.e. lender paid (MI), so read your mortgage insurance disclosures carefully). Borrowers are entitled to receive a refund of the unearned portion of the unused tax and insurance premium they paid once the mortgage insurance policy is canceled. Additionally, all loans with borrower paid mortgage insurance policies which closed on or after 7/29/99, lenders are required to notify borrowers annually of their rights surrounding the cancellation process.
Q: If my development (or project) has an HOA, what type of insurance am I expected to obtain independently?
A: The master insurance policy, which is purchased on behalf of all unit owners by the HOA, covers all units or structures located within the development but does not typically cover an individual unit owner’s personal belongings located within their dwelling. Now the seconday market investors request additional insurance, HO-6 for all condos.
Q: Is it best to pay points up front to reduce the interest rate?
A: When points are paid on a loan, the result is to buy down the interest rate, typically 1 point (or 1%) will buy the rate down .25%. The key to analyzing whether paying points makes financial sense is to determine: How long do you anticipate remaining in the property? When would the breakeven point occur? For example if you pay two every year you will save 0.5 points. So you will get year 2 points back in about 4 years. The longer you stay on the property the more you will gain in the coming years: savings of $103/month equaling 58.25 months or 4.85 years to break even. You would want to hold the loan and remain in the property approximately 5 years for this to make sense. Other factors to consider are the tax implications of paying points (see our link to the IRS website) as well as the time value of money (could you put these funds to better use).
Q: Is it important to find an agent that works primarily in the neighborhood where I would like to live?
A: If you seek the assistance of a selling agent, (an agent who works with buyers rather than sellers) they frequently work with buyers who do not always know what area they would like to concentrate their search in and therefore these agents become familiar with a wider range of neighborhoods. It may be advisable to select an agent who is familiar with the county you are searching within. Although when listing a property for sale, an agent with a thorough knowledge of a particular neighborhood may produce the best results.
Q: Is it necessary to get pre-qualified before making an offer on a property?
A: It is always a good idea to have a lending professional or service evaluate your finances and render a determination of your loan qualifications prior to actually looking for property. To avoid frustration, before setting out to make an offer, know what loan amount you could likely qualify for.
Q: Is it possible to get a gift from a relative for 100% of the down payment?
A: Yes. A relative may provide 100% of the down payment as a gift, but the lender will likely ask that a letter be signed by the donor relative stating that the gift funds are not expected to be repaid. Also many loan products require a 20% down payment if the source of the down payment is exclusively from gift funds. Although it is worth noting that many portfolio lenders (i.e. banks & savings banks) may have smaller down payment requirements when the source is a gift from a relative.
Q: Is it possible to obtain a no cost loan on a purchase mortgage?
A: Yes. The rate may vary depending upon the costs the buyer is responsible for paying. For instance, the party paying for title and escrow fees is determined by your purchase contract and is based upon the custom of the county you are purchasing within. If the seller or builder is responsible for paying these big expense items, it is easier for a buyer to obtain a no cost loan. If the buyer is the party responsible for covering these expenses it may still be possible to obtain a no cost loan although the rate may be higher than it would typically be for no cost financing.
Q: Is it possible to obtain a no cost mortgage when refinancing your mortgage?
A: Yes. In fact no cost mortgages are extremely popular among refinancers. Because a borrower pays no non-recurring closing costs, it is easy to analyze how soon money is saved on a monthly mortgage payment by refinancing. Many homeowners will consider refinancing for as little as .25% improvement to their mortgage rate with no-cost mortgage financing.
Q: I’ve always heard about the 2% rule when refinancing, is it important?
A: This rule is somewhat obsolete due to the variety of closing cost options that exist today. With the proliferation of no cost and zero point mortgages, a potential refinancer can recoup the costs of refinancing very rapidly if not immediately. The 2% rule may be a helpful tool when paying both points and closing costs in order to refinance.
Q: Must I also have earthquake insurance coverage?
A: The lender should not ask you to add quake coverage to your standard policy unless your property is located in an earthquake hazard zone.
Q: Must I have flood insurance coverage?
A: The lender should not ask you to obtain a flood policy unless your property is located in a flood hazard zone.
Q: Must I obtain financing from the lender my real estate agent (or the builder) recommends?
A: You are never required to use the referred (or preferred) lender of a real estate agent or builder. Most real estate agents will provide their clients with 2-3 potential sources for financing, typically agents have access to an in-house lender as well as several outside lenders who they have had good experiences working with. The referred lenders may or may not offer the best array of loan products or the lowest rates. It is always a good idea to do some loan investigating on your own and if you find that the referred lenders do offer competitive pricing then you can make both yourself and your agent happy. But if you have a complicated transaction (i.e. an unusual property) or if you have problems with your loan application (i.e. bad credit), you must be certain to disclose everything to any potential lender you communicate with are certain you are making an “apples to apples” comparison of lenders. Large builders often have their own mortgage companies or affiliated financing partners who they prefer buyers within their developments use; sometimes the builder will offer loan closing cost concessions to buyers who opt to work with their preferred lender. But the same common sense would apply, do your homework carefully before committing to any lender and always be careful when shopping that you are making a valid loan comparison (i.e. same rate, points, closing costs, rate lock duration, etc).
Q: Once the offer is accepted, how long will it typically take to close the transaction?
A: This can vary from one transaction to another, depending upon seller and buyer contingencies. But in a tight seller’s market, the typical closing will occur within 30-45 days. In a buyer’s market, where there are many properties available for sale, closing could usually occurs within 30-90 days.
Q: Should I lock my interest rate at loan application or float the rate until closing?
A: The answer depends on one’s outlook for interest rates, whether you are satisfied with the current rate being offered (and would not be deterred from proceeding if rates declined), how far out the closing date is and whether or not a rate increase could affect your ability to qualify for the loan. With a purchase, there is a contractual obligation to close on a specified date. Some lenders try to take the guess work out of the process by allowing borrowers to lock and then float the rate down one time during the loan process , typically a borrower is required to bring in a fee of ½-1% of the loan amount which is then credited (or refunded) to them at closing. It is a lock fee the lender requires to insure the transaction will in fact close.
Q: What are the benefits of a loan modification?
A: Payments reduced to that you can afford.
Lock in low fixed rate to achieve target modified payment.
Principal balance reduced to remove or restructure negative home equity.
Foreclosure may be prevented at the end of a successful loan modification. Late payments & fees restructured to give you a fresh start.
Q: What documentation will the lender typically require from me to process my loan?
A: The answer depends upon the quality of your credit and the size of the down payment you will be making. On a typical fully documented loan application (where an applicant is seeking to qualify based on an employee’s salary), the lender will require: one month’s current paystub’s, W-2’s for the prior two years and bank and investment account statements for the prior 2-3 months. If an applicant is self employed (has a 25% or greater ownership in a business) then additional documentation could be required (i.e. 1040’s, 1165’s, 1120’s, P & L statement).
Q: What expenses are typically covered in the HOA dues?
A: HOA dues cover the general maintenance and upkeep of all common areas within the development. These dues also contribute to the premium payments for the master policy of insurance, which protects all unit owners. Also included in HOA dues are major repairs not covered by insurance, the HOA could handle these unexpected expenses by a special assessment of all unit owners or by raising the association dues.
Q: What financial documentation will I need to provide to get a loan?
A: The neurotically organized people have the last laugh on this one. Simply to get preapproved for a loan, the lender will ask for all kinds of paperwork, such as your pay stubs for the last 30 days, two years’ tax returns (plus W-2s or business tax returns if you’re self employed), proof of other income and assets, three months’ bank records for every account you have, proof of where your down payment will be coming from (such as a bank statement and/or a gift letter with the gift giver’s bank statement), the names, addresses, and phone numbers of your employers and landlords for the last two years, and information about your current debts, including account numbers, monthly payment amounts, and so forth.
Then, before the loan closes, the lender may ask for follow-up data. Likely examples include proof of where a particular deposit came from or a letter from your employer explaining discrepancies between your year-to-date income shown on your paycheck and the amount you actually earned over the most recent pay periods (a common issue as workplaces have raised and lowered people’s salaries with fluctuations in the economy).
Q: What if all I have is negative equity but I am current on my mortgage?
A: This is a top question in hard hit areas across the country. Home values have dropped and you can not refinance. Even worse your #1 investment has lost it’s value and you are upside down. In many cases homeowners are able to reduce their principal balance through loan modification.
Q: What is a FICO Score?
A: FICO, Fair Isoac Corporation scores are numeric representations of your credit profile. The higher the FICO score the better credit risk you are. Range is from 300 to 850 the medium score is about 723.
Q: What is a Loan Modification?
A: A loan modification is when your mortgage note is modified without refinancing. Homeowners struggling with payments, negative equity and loss of income are receiving loan modifications at a record pace. Homeowners may be able to have their rate, payment and even principal balance lowered. Lenders may accept a loan modification offer if presented correctly with the right documentation. It is in their best interest to accept a loan modification rather than deal with a foreclosure.
Q: What is a loan prepayment penalty and is it generally advisable to get a loan that has one?
A: A prepayment penalty on a loan allows the lender to charge a borrower additional interest, typically six months worth, when a loan is repaid during the penalty period, which is usually somewhere in the first three to five years of the loan. If a loan does have a prepayment penalty, this is clearly stated within the mortgage disclosures, mortgage note or prepayment penalty rider to the note. The advantage of taking a loan with a prepayment penalty is that it could carry a lower rate of interest or you may be permitted to take a loan without paying for non-recurring closing costs.
Q: What Is A Loan To Value (LTV).. and how does It determine The Size Of The Loan?
A: LTV stands for loan-to-value, which is the ratio of loan mortgage-related debt to the property’s value. The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to payout of their own funds.
Q: What is APR and how is it calculated?
A: APR stands for annual percentage rate and its purpose is to give borrowers a truer representation of the effective interest rate on their mortgage. APR factors in certain closing costs and fees and spreads these costs over the life of the mortgage, along with the note rate, to arrive at a more accurate annualized percentage rate than the note rate alone represents.
Q: What is mortgage insurance and am I required to have it?
A: Mortgage insurance (MI) is paid by the borrower to protect the lender against payment default on the mortgage and is required when only one lender is financing in excess of 80% of the value or purchase price of a property. It can also be required at other times if the lender perceives a higher risk associated with a particular loan program. There are financing options limited down payment borrowers can employ to avoid mortgage insurance for example, obtaining both a 1st and a 2nd mortgage rather than applying with one lender for a 1st mortgage over 80.00%.
Q: What is the best way to shop for a loan?
A: It is a good idea to contact at least three lenders for input on loan programs and rates. You can do all of your shopping on-line or by phone. If there are any usual twists to your loan scenario, it is best to disclose as much information up front as possible to be certain you are making an “apples to apples” loan comparison amongst lenders. When making loan comparisons, you must be sure you are comparing loans of similar terms, e.g. 30 years fixed with zero points, do the loans you are comparing have prepayment penalties and do they have similar rate lock duration’s?
Q: What is the difference between a zero point and a no cost loan?
A: With a zero point loan, a borrower has opted not to pay points to buy their interest rate down but will still be paying for their base closing costs (i.e. appraisal, credit report, lender doc fees, title and escrow, etc.). With a no cost loan, a borrower has accepted a higher interest rate, (typically .25%-.375% higher than on a zero point loan) with the trade off that the lender or broker will pay for all their non-recurring closing costs (all base closing fees except for interest, taxes and insurance due).
Q: What is the difference between loan pre-qualification and pre-approval?
A: A pre-qualification occurs when a prospective buyer discloses, either verbally or by providing documentation of, their income, assets and credit so that a loan agent may determine the loan amount that a buyer could likely qualify for based on standard lending guidelines. A pre-approval involves an underwriter (the lender’s risk evaluator) actually reviewing a prospective buyer’s loan application with a formal credit determination occurring that is subject to an appraisal, title report and purchase contract, along with whatever supporting documentation the underwriter may request.
Q: What is the HAMP (Home Affordable Modification Program)
A: The Home Affordable Modification Program (HAMP) is designed to help as many as 3 to 4 million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. The program provides clear and consistent loan modification guidelines that the entire mortgage industry can use. Borrower eligibility is based on meeting specific criteria including:
- Borrower is delinquent on their mortgage or faces imminent risk of default
- Property is occupied as borrower’s primary residence
- Mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.
After determining a borrower’s eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower’s total pretax monthly income:
- First, reduce the interest rate to as low as 2%. Next, if necessary, extend the loan term to 40 years. Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.
- Note: Servicers may elect to forgive principal under HAMP on a stand-alone basis or before any modification step in order to achieve the target monthly mortgage payment. The Home Affordable Modification Program includes incentives for borrowers, servicers and investors.
Q: What is the minimum down payment typically required to purchase an investment or rental property?
A: The down payment requirement can vary depending upon how tight money is in the economy at the time you are purchasing and can also vary amongst lenders. For example, lenders who underwrite their loans to meet Fannie Mae’s and Freddie Mac’s guidelines may require a 20-30% down payment (although there have been times when they required as little as 10% down). But portfolio lenders (i.e. banks & savings banks) may have looser down payment restrictions. Check with your loan coordinator, but the typical down payment required to receive the best non-owner occupied rate would be 20-30%.
Q: What is title insurance and why do I need it?
A: Before you purchase a property or close on a new loan, it’s essential to know that the title to the property will be free and clear, free of prior defects and indebtedness. A homeowner and prospective lender need to be certain that what is available on the property is what is referred to as a “marketable title”. A title company researches the legal history of the property which entails searching public records in the offices of the county recorder. Problems with the title could threaten the mortgage, limit ones use and enjoyment of the property and could result in financial loss. A policy of title insurance protects a homeowner’s title and the insurer covers the cost of any legal challenges.
Q: What kinds of government loans are available to homebuyers?
A: Several federal, state, and local government financing programs are available to homebuyers. The two main federal programs are:
FHA loans: The Federal Housing Administration (FHA), an agency of the Department of Housing and Urban Development (HUD), offers insurance backing to loans made to U.S. citizens, permanent residents, and noncitizens with work permits who meet financial qualification rules. Under its most popular program, if the buyer defaults and the lender forecloses, the FHA pays 100% of the amount insured. This loan insurance lets qualified people buy affordable houses. The major attraction of an FHA-insured loan is that people with passable credit scores can put down as little as 3.5%. Another plus is that, unlike with conventional loans, FHA-backed loans allow the entire down payment and costs to come from a gift (perhaps from family). For more information on FHA loan programs, contact a regional office of HUD or check the FHA website at www.hud.gov.
VA loans: U.S. Department of Veterans Affairs (VA) loans are available to men and women who are now in the military and to veterans with honorable discharges who meet specific eligibility rules relating to length of service, credit history, and recent employment. The VA doesn’t make mortgage loans, but guarantees part of the house loan you get from a bank, savings and loan, or other private lender. If you default, the VA pays the lender the amount guaranteed and you, in turn, will owe the VA. This guarantee makes it easier for veterans to get favorable loan terms with low or no down payment and no PMI. For more information, check www.va.gov or contact a regional VA office for advice.
Other government loan programs: For information on other government loans, contact your state and local housing offices. They often have programs available for first-time homebuyers who are purchasing modestly priced properties. To find your state housing office, check the State & Local Government on the Net directory. Or go to your state’s home page, where you may find the listing for your state’s housing office.
Q: What Types Of Loans Are Available?
A: Fixed Rate Mortgages: Payments remain the same for the life of the loan. Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits.
Q: When getting an investment or rental property, what is the difference in rate for non-owner occupied vs. owner occupied financing?
A: Conforming non-owner occupied rates are typically 3/8% higher than owner occupied interest rates. The down payment or equity requirement is usually higher for non-owner occupied loans as well, typically 20-30%+.
Q: Why do I need to pay for another policy of title insurance when we already own the property and purchased title insurance when we bought the house?
A: Before closing your new mortgage, your new lender must be certain that the title to the property will be free and clear, free of prior defects and indebtedness. A new policy is needed to protect the new lender and subsequent investor of your new mortgage. Both a homeowner and prospective lender need to be certain that what is available on the property is what is referred to as a “marketable title”. A title company researches the legal history of the property that entails searching public records in the offices of the county recorder. Problems with the title could threaten the mortgage, limit ones use and enjoyment of the property and could result in financial loss. A policy of title insurance protects a homeowner’s title and the insurer covers the cost of any legal challenges.
Q: Why do lenders require gift letters from people giving me money to buy a house? And what should my letter say?
A: Many homebuyers get help from family in making their down payment. That’s fine, but the lender wants to make sure the gifts aren’t disguised loans – in which case your debt burden is greater than you’re pretending it is, and you may have trouble repaying the bank or institutional lender. For this reason, lenders routinely require “gift letters” of anyone contributing money to your house purchase. The letter itself can be fairly simple – in fact, the lender may give you a form to fill out. It should say something like:
To Whom It May Concern:
We [donor's names] hereby certify that we have made [or will make, on a stated date] a gift of $[amount] to [names of recipients], our [child, sibling, grandchild, or other relationship between recipients and donors], to be applied toward the purchase of the property located at [address].
No repayment of this gift is expected or implied either in the form of cash or future services.
[Sign and date]
You’ll need to give the original signed version to the lender.
Of course, a signed letter is no guarantee that you haven’t made a separate verbal agreement with your donor that you’ll repay the money. But doing so would constitute mortgage fraud – a crime punishable by fines and jail time.
Q: Will the lender require a fee to lock in my interest rate?
A: For a traditional 30-90 day rate lock, the lender will not require the borrower to pay a lock fee, but for the privilege of locking for a period beyond 90 days they may. Some lenders allow borrowers to lock and then float the rate down one time during the mortgage process, typically a borrower is required to bring in a fee of ½-1% of the mortgage amount which is then credited (or refunded) to them at closing. It is a lock fee the lender requires to insure the transaction will in fact close.