Let me start with what I feel is the most misunderstood term in the entire mortgage industry: APR. Nine times out of ten there is a startled expression and a “but I thought you said…” when one reaches the disclosure revealing the APR. The most important thing to know about APR is this is not your interest rate.⇔Read that again.
APR – Annual Percentage Rate is an aggregate of all charges related to your loan, including, but not limited to: interest rate, insurance, title fees, HOA transfer fees, appraisals and re-appraisals for needed repairs, closing costs. Please be aware that even after you have locked your interest rate, the APR can change due to the adjustment of any associated fee.
Interest Rate – Your interest rate is solely, the percentage charged for use of the principal loan amount, and includes no other charges.
Lock – The guarantee of a specific interest rate for a specific amount of time. After it is locked, your interest rate will not rise provided the loan is closed on or before the pre-determined expiration date. This date is often very close to the closing date on your contract. Together you and your loan officer will determine the best time to lock your rate.
Pre-Qualification & Pre-Approval – Though very similar, there is a difference. When you request to be Pre-Qualified, the lender collects all of the information necessary, checks your credit, and determines how much you are qualified to borrow. A Pre-Approval may include running your information through an automated underwriting system, or placing your file before an actual Underwriter, so they are able to commit to the loan prior to the borrower identifying a property.
Ratios – or debt-to-income ratios: The rate/relationship of your monthly income compared to your monthly housing expense comprises the Front-end or Top ratio. The Back-end or Bottom ratio is determined by weighing your total monthly living expenses (cars, credit card payment, school loans, etc) against your total monthly income. Lenders use these numbers to determine a borrower’s ability to repay the mortgage.
Mortgage Insurance – Insurance protecting the lender against loss in the event that a borrower defaults on the loan. Generally required for loans greater than 80% of the purchase price of the property. A fairly common misconception about mortgage insurance is that it is voluntary, it is not. Where mortgage insurance is indicated, it is required. MI is paid in two parts, an upfront percentage of the loan generally rolled into the mortgage amount, and a monthly payment incorporated into your mortgage payment. After reaching a loan to value of less than 80% you may request to have mortgage insurance removed.
Appraisal – Written analysis of the estimated value of a property, by a qualified, certified appraiser. The appraiser must be an independent 3rd party and is not beholden to the lender, the seller, the buyer, or any of their agents. Though subjective, the appraisal is meant to, and generally does, present an accurate accounting of the current market value of a property. It takes into consideration, most heavily, currently sold comparables (similar properties), and to a much lesser extent pending and current listings. Relatively standard adjustments are made for differences in the comparable properties.
Credit Inquiries – You will be asked to explain inquiries that appear on your credit report. These are identified by a date and company name, and are an occasion when your credit was checked by the company stated. This could be a random check by a credit card company that you already deal with, an occasion when you may have requested additional credit to buy a car for instance, or open a new store charge card.
Processing – The scrutiny of all documents you have provided to your lender. A Processor will verify your employment and income, substantiate account balances and availability of funds to close, review contract terms and deadlines, and generally provide an overview of the file for the Underwriter.
Underwriting – This is the final analysis of the complete file. Nothing can be missing from the file at the point of final underwriting approval. Your file must meet certain government laws and industry regulations and this is where that determination is made. Underwriting issues the initial approval, conditional on any incomplete documentation. Final approval is extended when all conditions are submitted back to Underwriting.
Conditions – Additional terms that must be met in order to complete your loan package. Some initial approvals involve conditions for the borrower, some do not. When all conditions are met your file will be cleared to close and documents will be sent to the title company.
Thanks for visiting, hope to see you next time. And as always, if you have any questions just give me a call. Until next time,
