At First Choice Loan Services Inc., we take great strides to make your home financing process as efficient, easy and enjoyable as possible. Whether you’re a first-time home buyer or a homeowner several times over, you probably will find that you have a lot of questions about the home financing process. To help you get the most out of your home mortgage experience, we’ve compiled the following answers to some of the most frequently asked questions by home buyers everywhere. Of course, if your question isn’t answered below, you’re always welcome to contact us directly for more information and resources.
What does pre-qualification mean?
Pre-qualification is an estimate of what you might be able to borrow and shines light on the path forward in your home-buying journey. Based on your income, assets, and sometimes a credit check, First Choice Loan Services will outline a loan amount and loan program which will greatly help guide your search.
While a pre-qualification is not a commitment to lend, it does offer many benefits that come in handy throughout the home-buying process.
- Know your price range to help to narrow your options.
- Address any credit problems early in the lending process.
- Gain leverage in the negotiating process. In the event your home offer is matched, pre-qualification gives you the advantage of equalizing that offer.
- Demonstrate financial backing and solvency.
Before I start my home search, should I go through the pre-qualification process?
Yes. Pre-qualifying saves you time by providing a realistic price range, helps you determine a specific dollar figure to ask for, and gives you an advantage over competing homebuyers who are not pre-qualified. During pre-qualification, First Choice Loan Services will help you to determine the approximate amount you can borrow. Your current income, assets and debt over the last two years helps to determine if you pre-qualify for a mortgage. What does it mean to be pre-approved for a loan?
Loan pre-approval carries more weight than pre-qualification. First Choice Loan Services will determine the specific mortgage amount for which you are approved to give you a clear picture of the interest rate you will be charged on the loan. Once you're pre-approved, you will receive in writing the exact loan amount for which you are approved. This gives you the advantage of a specific price range when searching for your home.
What documents are needed to apply for a home loan?
Documents Required by All Borrowers
- Copies of W-2s for the past 2 years
- Copies of your two most recent consecutive pay stubs showing year-to-date earnings
- Copies of checking and saving account statements for past three months (all pages)
- Copies of quarterly or semi-annual statements for checking, savings, IRAs, CDs, money market funds, stocks, 401k, profit sharing, etc.
- Copy of your sales contract when ratified
- Employment history for the previous 2 years (acknowledging any employment gaps during this time)
- Residency history for the past 2 years including your name, phone, address and account number of the land or mortgage company
- For rental property, copies of leases
- A canceled earnest money check when it clears, or a corresponding bank statement
- Proof of commissioned income; if income is 25% or more of your base, then you must show tax returns
- A check for the expense of appraisal and credit report
- A copy of your refinance note, deed of trust, settlement statement, survey and insurance information
- Any assets used for down payment, closing costs and cash reserves must be documented
- If you’ve paid off a mortgage in the past two years, copies of your HUD1
- A copy of your applicant’s and co-applicant’s driver’s license
- Copies of your past 2 years’ tax returns
- A copy of your Social Security Card for each applicant and co-applicant
Documents Required by Self-employed Borrowers
- Copies of your tax returns from the past 2 years (with all schedules, including K-I's if applicable)
- A copy of your current profit and loss statement and balance sheet
- A copy of corporate/partnership tax returns for last 2 years if you own 25% or more of company
- Copies of W-2s and/or 1099 forms
Documents Which May be Required
- If your move is financed by an employer, you must supply your relocation agreement, which is the buyout agreement plus documentation outlining company-paid closing cost benefits
- If you’ve previously declared bankruptcy, then you must bring copies of your petition for bankruptcy and discharge, including supporting schedules
- If you are divorced, then you must present your divorce decree
- If you’ve received Social Security or retirement trust income, then you must provide documentation supporting monies received, such as direct deposit bank statements, awards letter, or evidence income
Documents Needed for FHA or VA Loans
- FHA Loans: Provide a copy of Social Security Card and driver’s licenses for each applicant and co-application
- VA Loans: Provide an original certificate of eligibility, a copy of DD214 discharge paper, and a name and address of the nearest living relative.
If I have a history of bad credit, is it still possible to qualify for a loan?
Yes. In fact, many people face this same challenge in tough financial situations. A history of bad credit does not necessarily mean you are automatically disqualified for a loan.
What is the difference between annual percentage rate (APR) and interest rate?
“The interest rate is the cost of borrowing money expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan. An Annual Percentage Rate (APR) is a broader measure of cost to you of borrowing money. The APR reflects not only the interest rate but also the points, broker fees, and certain other charges that you have to pay to get the loan, including certain parts of your closing costs. For that reason, your APR is usually higher than your interest rate.”
- Consumer Financial Protection Bureau (CFPB)
How can I obtain a copy of my credit report and appraisal?
How does my credit score impact my loan rate?
Better interest rates are often extended to those with a higher credit score because they represent a lower risk to the lender. It’s also possible for a lower down payment amount to be required for those with a higher credit score. The flip side is also true for those who have lower scores. Qualifying for a mortgage with a lower credit score can be more challenging, and higher down payment amounts or interest rates may be necessary.
To prevent lenders from interpreting the credit score too subjectively, a standardized grading system has been established and is used by most lenders.
Credit Score Grade:
- 800 - 850.......... A+
- 750 - 799.......... A
- 700 - 749.......... A-
- 650 - 699.......... B
- 600 - 649.......... C
- 550 - 599.......... D
- 500 - 549.......... E
- 300 - 499.......... F
It is this score that lenders use to analyze the risk of extending the loan and that greatly affects the rate and other aspects of your mortgage.
How do I know which loan is the best fit for me?
After determining your budget, it's time to choose the right loan for you. There are many different types of mortgages available, and First Choice Loan Services is here to help you select the one well suited for your bottom line and lifestyle! There are several key considerations when choosing a loan:
- Length of time you plan on staying in your home
- Deciding between a fixed-rate and adjustable-rate mortgage
- Your available funds for a down payment
- Eligibility for special options such as a VA or USDA loan
First Choice Loan Services will work with you to determine the best loan options for your specific lifestyle and budget.
What types of mortgage options does First Choice Loan Services offer?
First Choice Loan Services Inc. offers the following loan options:
- Conforming Fixed (10/15/20/25 or 30 years)
- Conforming Adjustable
- Conforming DU Refi Plus
- FHA Fixed & Streamline
- VA Fixed & IRRRL
- Jumbo Fixed & Adjustable
- Renovation Loans (203K Full & Streamlined)
- Permanent Construction
- Float Down Option
What’s the difference between FHA and VA loans?
FHA loans are guaranteed by the Federal Housing Administration (FHA), a government agency that works with approved mortgage lenders such as First Choice Loan Services.
The Department of Veterans Affairs guarantees VA loans . Those who may be eligible for this type of loan include active duty personnel, Veterans and/or their surviving spouses.
How can I determine my interest rate?
Your credit score or “FICO®” Score, summarizes your credit risk and helps lenders determine your interest rate when applying for a loan. Typically, the higher your score, the more likely you’ll receive a lower interest rate on a loan. You can start by acquiring a complete copy of your credit report from agencies such as Experian, Equifax and TransUnion. First Choice Loan Services will walk you through available interest rates for your loan. You can lock in your interest rate for up to 180 days (additional restrictions and fees may apply for lock terms in excess of 90 days).
Should I opt for a Fixed- or Adjustable-Rate Mortgage?
An adjustable-rate mortgage means that your monthly payment can change after a certain period of time. Typically you'll find that adjustable-rate mortgages have a period of fixed rates at the beginning of the loan term that tend to be lower than fixed-rate mortgages, meaning a lower starting monthly payment. An adjustable-rate mortgage would make sense if you predict living in your home for only a few years.
With fixed-rate mortgages, your interest rate and monthly principal and interest remain fixed for the entirety of the loan. This option is among the most popular for loan applicants because, unlike adjustable-rate mortgages, it protects homeowners from future monthly payment increases. A fixed-rate mortgage makes sense if you're planning to purchase a home for 7 years or more. You gain the stability of knowing exactly what you'll pay towards principal and interest every month.
How much will my down payment be?
Your down payment depends on your income and eligibility. First Choice Loan Services can present you right several down payment options that best fit your financial goals and needs.
What is PITI?
PITI is your monthly home loan payment, which includes Principal, Interest, Taxes and Insurance, otherwise known as PITI.
- Principal is the amount borrowed to buy the home, not including interest.
- Interest is the expense for money borrowed.
- Taxes are determined by local governments, and are normally paid as part of the monthly mortgage payment to the lender, who collects it into an escrow account. At the time taxes are due, the lender will pay the government this amount on the buyer’s behalf.
- Insurance is also typically paid to the lender who collects it in an escrow account. This includes two standard types of coverage: Mortgage Insurance and Homeowner’s Insurance.
- Mortgage Insurance is often necessary for those contributing a small amount for their down payment. In the event that the home buyer defaults and is unable to pay back the loan amount, Mortgage Insurance protects the lender.
- Homeowner’s Insurance covers damages caused by dangers such as natural disasters (among other incidents).
What does it mean to waive escrows?
Waiving escrows mean you will assume the responsibility of paying your taxes and insurance rather than having them included in your monthly mortgage payment. You can only waive escrows if your loan permits. This path may add an extra fee to your closing costs.
What inspections or appraisals are required by my lender?
For most transactions, your lender will require a home appraisal to recommend any necessary repairs. If these repairs are included in your contract, then they must be completed before closing on your home. To verify that the repairs were completed, the appraiser will perform a final inspection.
What does it mean to refinance a mortgage?
When refinancing, your lender pays off your existing mortgage and then extends a new mortgage to you. Restarting your mortgage may sound like a step backwards, but the benefits of refinancing can outweigh the commitment to a new home loan. When you choose to refinance, you could be able to:
- Lower your vulnerability to a variable interest rate by changing from an adjustable-rate mortgage to a fixed-rate mortgage.
- Lengthen the repayment term to decrease your monthly mortgage payments.
- Decrease interest costs over the life of the loan with a lower mortgage interest rate.
- Pay off your loan quicker with a shortened loan term.
- Draw some cash out from the existing home equity and free up funds to use towards retirement, tuition, home improvements and more.
In general, if your mortgage rate is higher than current interest rates, then it’s typically a good idea to refinance. There are other circumstances in which it may be wise to opt for refinancing, such as:
- If your home value has appreciated in value, refinancing can help you to take advantage of your home’s increased equity.
- If mortgage interest rates have fallen 1/2% to 5/8% below your current interest rate, then refinancing can help to shorten the terms of your repayment or lower your monthly payment while maintaining a comparable repayment term.
- If it’s early in the life of your mortgage term and payments are going mostly toward interest, then refinancing can help more compared to later in the life of the mortgage when payments are being directed more toward principal than interest.
What is the debt-to-income ratio?
The debt-to-income ratio, or DTI, is the percentage of your monthly income that is consumed by your monthly debt payments. To determine your debt-to-income ratio lenders use a three step process:
- They determine the sum of your monthly recurring financial responsibilities such as student loans, car loans/leases and credit card payments.
- Add in your forecasted monthly mortgage payment to the monthly debt total.
- Divide your monthly debt total by your monthly pre-tax income. The percentage from this is your debt-to-income ratio.
To put this in a true-to-life example, imagine your monthly recurring debts and forecasted mortgage payment total $1,000 and your monthly income is $4,000, your debt-to-income ratio would be 25%. Typically, your chances of qualifying for a home loan increase the lower your debt-to-income ratio is. If you need help determining your specific debt-to-income ratio, your First Choice Loan Services Loan Originator can help!
How can I lower my debt-to-income ratio?
Most lenders will want your debt–to-income ratio to be no more than 36%. If your DTI is too high, there are several avenues you can take to lower it.
- Pay down your credit cards to reduce monthly debts.
- Increase the amount of your down payment to lower the projected monthly mortgage payment.
- Consider a less expensive home or alternative sources of income.
First Choice Loan Services can help you to understand the implications of your debt on your loan and determine practical paths to reducing monthly debts.