Home Loans & Mortgages FAQ
More than ever, applying for a home loan or mortgage has become a daunting process due to increased regulations and the resulting piles of paperwork that must be filled out. There are also many different types of products available and it is not always clear what the loan terms mean. This guide will try to help you understand the choices available to you and what you can do to get the best rates.
How do I get the best loan or mortgage rates?
In order to get the best loan or mortage for your particular situation, the most important thing you can do is to educate yourself about what options are available to you. As the old saying goes, "Knowledge is Power."
We recommend that you get and review a copy of your personal credit report and credit score before meeting with lenders. This is because there will frequently be mistakes on your credit report that you will want to get corrected and also because lenders will want to pull your credit report/score before they quote you rates.
When you talk to or meet with a lender, try asking for a "good faith estimate." This is a full disclosure of the estimated charges for a loan. They may not be willing to provide one without pulling your credit, but it never hurts to ask and you should definitely get this before signing any loan docs.
For more information on credit reports and credit scores, please check out our new credit score FAQ.
Shopping For A Home Loan Or Mortgage
Bank Loan Officers versus Mortgages Brokers
When shopping for a loan there can be a substantial difference between the loan that is available to you from a bank loan officer versus an independent mortgage broker and it is helpful to understand the key differences. The following descriptions provide some of the most common distinctions.
Bank Loan Officers
The bank loan officer works at a bank, credit union, or other financial institution that offers home loans directly to the consumer. The loan officer is employed by the institution that is offering the loan or mortgage. They will often have a variety of loan products available and all of their loans originate from within their own institution.
There are a number of benefits to working directly with a bank or credit union, as well as some potential drawbacks. In some cases consumers with very good credit scores will be offered better interest rates at a bank or credit union than are available through independent mortgage brokers. This is partly because the financial institution can make more money if it doesn't have to pay for the services of an outside mortgage broker. Also, if you have an existing banking relationship, then they may be able to use that as a positive factor in evaluating your loan.
On the other hand, for consumers with more challenging credit scenarios and/or more complex financial situations, there may be more options available through an independent mortgage broker.
A mortgage broker is a professional who in Oregon is licensed by the state's division of Finance & Securities. They may work independently or be part of a larger brokerage company. The primary distinction between the mortgage broker and the bank loan officer is that the mortgage broker or their brokerage company are not funding the loan themselves. Just as with banks, there are pros and cons to working with a mortgage broker.
One of the primary benefits to working with a mortgage broker is that they will frequently have access to home loans and mortgages from hundreds of different financial institutions. This can be especially helpful when dealing with unusual financial situations, very bad credit, or more exotic types of loans such as construction loans or land/lot loans.
Some potential drawbacks are that they may have less control over the loan decision making process and are thus somewhat more at risk of being affected by changes in the financial markets. Even so, in most situtations it is worthwhile to evaluate all of your options.
Upfront Mortgage Brokers
If you are going to be working with a mortgage broker, you may want to consider working with an "upfront mortgage broker." These are brokers that are members of the Upfront Mortgage Brokers Association, which is a non-profit association whose members have committed to full-disclosure of the fees they are getting paid. The benefit of this, is that in some cases mortgage brokers will quote a loan product with a higher interest rate that includes something called a Yield Spread Premium (YSP) which may work out to be an additional commission fee that they receive and that you are paying for. Thus, if you do decide to work with a mortgage broker, and especially if you choose one broker to work with exclusively, then it is recommended that you ask for full disclosure of the fees that they are being paid, including YSP, to ensure that you understand the nature of the financial relationship you are establishing.
What factors affect a loan's interest rate?
There are many different factors that will affect the interest that a lender will offer you. Some examples are:
- Size of Down Payment
- Fixed Rate or Adjustable Rate Loan
- Points Paid
- Credit Scores
- Conforming or Non-Conforming (Jumbo) Loan
- Type of Real Estate Loan (Residential, Multifamily 1-4 Units, Commercial, Lot/Land, Construction, Condominium)
- Employee or Self-employed
- Owner Occupied or Investment Property
- Length of Employment
How much of a down payment do I need?
The downpayment amount that you need will vary greatly depending on the specifics of your loan. Many of the loan factors listed above will influence the downpayment requirement. Typically, loans with less than a 20% downpayment will require PMI or Private Mortgage Insurance. This is an additional fee added to the monthly payment for your loan. However, there are alternatives to paying PMI, such as combo or piggyback loans, where you will get a second loan/mortgage. Ask your lender for more details on these options if you want to make only a small downpayment.
What is the difference between a fixed rate and an adjustable rate mortgage?
Generally speaking, a fixed rate loan refers to a loan for which the interest rate is fixed for the entire life of the loan. The most common product of this type is a 30-year fixed rate mortgage, however, 10, 15, and even 40 year mortgages are now available. These are the most common and popular types of loans because the payment amount is not prone to changing.
Adjustabe rate mortgages (ARM), on the other hand, are prone to having the interest rate change or "reset" at specified intervals. When this happens the payment amount will go up or down, generally based on a published financial index such as the 1-year US Treasury Bill. There are many different types of ARM loans, and the most common type is a hybrid ARM loan where the interest rate is fixed for an extended period of time, such as 1,2,3,5,7, or 10 years or more. The primary risk for consumers purchasing with ARM loans is that interest rates will rise and then their payments will increase to an amount that they are no longer able to afford.
What are points?
Mortgage points are fees paid to the lender to lower your interest rate. They are expressed as a percentage of the total loan amount. 1 point = 1% of the total loan amount.
What is a credit score?
A credit score is generated when a lenders requests or "pulls" your credit report from a credit bureau. For more information on credit scores, please check out our new credit score FAQ.
What is a conforming loan?
A conforming loan is a loan that meets the guidelines set by Fannie Mae or Freddie Mac. Every year, in January, the conforming loan limits are set based on the median cost of housing in a region. The limits for most counties in the Portland Metro area are currently $417,000 for a single family dwelling.
What is a Jumbo Loan?
A jumbo loan, also known as a non-conforming loan, is a loan for an amount greater than the conforming loan limit. Thus, for most of the Portland area that would be a loan greater than $417,000.
What is an FHA Loan?
An FHA Loan is a program provided by the Federal Housing Administration that can have lower down payment requirements and easier qualification guidelines than many conventional loan programs and is available for loans up to $418,750 for a single family dwelling. These loans are only offered through approved lending institutions and most large lenders are FHA approved.
What is the difference between a home loan and a mortgage?
It is a fairly common practice for people to use the two terms interchangeably, as I am doing in most of this FAQ. Technically, a "loan" in financial terms could be secured (ie home loan or car loan) or unsecured (ie credit cards), and a home loan would generally refer to a loan that is secured by residential real estate. A "mortgage" or "mortgage loan" is more specific and is exclusively used in reference to a loan that involves real estate, however, technically most loans in Oregon and many other states or done via a "deed of trust" which is a slightly different legal instrument than a traditional "mortgage."