Discover Your Knowledge of the Homebuying
Process
Q:
Most mortgage lenders can qualify a potential borrower for
a mortgage amount of about four times his or her gross annual
salary.
TRUE or FALSE
A: This
is false. Most lenders agree that a borrower can afford
a home that is 2 to 2-1/2 times his or her gross salary.
Q:
What is the maximum mortgage amount homeowners may deduct
from their federal income tax for mortgage interest paid
for first and second homes, and any improvements made to
those homes
A: $1
million.
Q:
A 15-year fixed-rate mortgage saves you nearly 60 % of the
total interest costs over the life of a loan when compared
to a 30-year mortgage.
TRUE or FALSE
A:
True. You may also shorten
the life of a 30-year loan (and thus save interest costs)
by making additional principal payments on your loan along
with your normal payments. These are known as curtailments.
Q:
Mortgage lenders refer to a homeowner's monthly payment
as "PITI" because:
* Homeowner's should be "pitied"
because of their monthly payments.
* It includes principal, interest, taxes and insurance.
* "Piti" is the French word for "mortgage
payments".
* PITI is short for "Pay It on Time In full.
A: It
includes Principal, Interest, Taxes and Insurance.
Q:
A "jumbo" loan is:
* A mortgage that is really
too big for you to afford.
* A loan that you pay monthly for a time and then pay one
"jumbo" payment on the remaining principal.
* A mortgage that is larger than the limits set by the Federal
National Mortgage Association (FNMA) and the Federal Home
Loan Mortgage Corporation (FHLMC).
* A loan to buy a house with more than four bedrooms.
A: A
jumbo loan is any mortgage larger than the limit set by
FNMA and FHLMC, commonly know as "Fannie Mae"
and "Freddie Mac", respectively. This amount changes
nearly every year due to inflation and current economic
trends.
Q:
A "buy-down" refers to:
* A discount on the home
price so you can afford it.
* A discount on the loan's interest rate during the first
years of the loan to make financing easier to qualify for.
* Money you pay the lender to give you a lower interest
rate.
* Buying a cheaper house than you live in now; also called
a "trade-down".
A:
A "buy-down" is a temporary reduction in
the rate of a mortgage, usually for the first two or three
years. One common example is a 3/2/1 buydown. On a 9% fixed-rate
loan this would make the first year's interest 6%, the second
7%, the third 8% and the fourth through the last 9%. However,
you would qualify at the 6% rate. This is a very attractive
option for buyers with some extra cash who would like to
qualify for a more expensive home.
Q:
Typical closing costs can range from:
* 10 to 15 % of the loan
amount.
* 3 to 8 % of the loan amount.
* 8 to 10 % of the loan amount.
* 1 to 3 % of the loan amount.
A: You
can count on your closing costs being anywhere from 3 to
8 % of the total loan amount. Where you fall in this range
depends on the type of loan (FHA, VA or Conventional), whether
or not you've financed some of the closing costs (like first-year
insurance), etc. A good rule of thumb is to stick with 8%
as an estimate and you'll be safe.
Q:
Making an extra mortgage payment each year shortens the
life of a 30-year loan by:
* Approximately 7-8 years.
* About 5 years.
* About 15 years.
* It doesn't shorten the life of the loan, it just decreases
interest costs.
A: Approximately
7-8 years. Amazing, but true.
Q:
A "convertible" mortgage is one which:
* Allows you to buy a car
with the house.
* Allows the homeowner to decrease the loan's interest rate
without refinancing the mortgage.
* Can be used like a giant credit card.
* Allows you to make an adjustable rate mortgage (ARM) into
a fixed-rate mortgage when interest rates are low.
A: There
are two answers: The "convertible" means that
you can convert an ARM into a fixed-rate mortgage (usually
during certain periods) for a nominal fee, without refinancing
the loan or changing the terms. This is especially attractive
if the new fixed rate is lower than your previous ARM rates
(i.e. interest rates are falling).
Q:
Lenders normally recommend refinancing a mortgage if:
* The market rate is one
or more percentage points below the rate on the loan.
* The homeowner has no equity in the property.
* The homeowner doesn't want to pay any taxes.
* The homeowner has a "convertible" mortgage.
A:
It is does not usually pay to refinance your home if the
spread between your current rate and the rates you can get
on a new loan are less than one percent apart.
Q:
Mortgages backed by the Federal Housing Administration (FHA)
require what size down payment?
* About 3 to 4 % of the loan
amount.
* About 10 to 20 % of the loan amount.
* Nothing down.
* More than 20 % of the loan amount.
A:
FHA loans are often very popular
because of the low down payment they require.
Q:
When discussing "points", your lender means:
* The things you really like about your new house.
* Prepaid interest. Each point equals 1 % of the loan amount.
* A rating system used by lenders to qualify applicants.
* The number of traffic violations that show up on your
credit report.
A:
By paying points up front (at
the time of closing), you may lower your overall interest
rate. For example, on a $100,000 loan, you may have an interest
rate of 10%. By paying one point ($1,000) extra at closing,
you may be able to lower your interest rate to 9.75%. Make
sure your lender explains the points and interest rates
available to you for the loan you choose.
Q:
What is a deed of trust?
* Money you have received
before you have actually qualified for the loan.
* A special document waiving your right of rescission.
* A document used in place of a mortgage in some states.
* A special mortgage you can get if the lender knows you.
A:
Every state has its own rules,
regulations and terms concerning the borrowing of money
for a house.
Q:
A VA loan is:
* A long-term, low- or no-down
payment loan guaranteed by the Veterans Administration,
which is restricted to individuals qualified by military
service or other entitlements.
* A loan on a home sold at a discount because it is "Vacant
and Abandoned".
* A loan on which the homebuyer pays a premium of up to
1 %.
* A loan for an animal hospital funded by the Veterinarians
of America.
There are two answers:
VA loans are popular because they offer a very low- or no-down
payment, but are restricted to a certain group of people
who qualify. Contact your lender to see if you are a qualified
candidate for a VA loan.
Q:
A title search:
* Examines the homebuyer's
background to see if he or she is descended from royalty.
* Examines local public land records to determine the legal
ownership of a property.
* Looks for books in the public library that tell about
home financing.
* Verifies the property's past owners.
A:
The title company is responsible
for making sure that you are the new free-and-clear owner
of the property you are buying. In addition, their insurance
fee will cover you in the case where they have made a mistake
and someone else claims a lien or right to your property.
