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  • Why Us
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  • Guide
  • Contact Us

Mortgage Basics

What is Mortgage ?

  • Type of loan secured by the home you purchase
  • Promise to pay back lender in monthly payments
  • Stop paying monthly payments results in Default
  • When Defaulted, Lender can take back the property (Foreclosure)

Monthly Payments

  • Principal – What you borrowed/financed
  • Interest – What the lender charges you to borrow the money 
  • Taxes – What you pay in property taxes
  • Insurance – What you pay to insure your home from damages 

Escrow Account

  • Taxes and insurance are usually held in an escrow account 
  • Taxes and Insurance paid by mortgage company when due 
  • A portion of your monthly payment goes to escrow 
  • Set aside a small amount each month for taxes/insurance
  • Avoid a large, semi/annual out-of-pocket expense 
  • Reduce your cash flow each month.
  • Some lenders mandate an escrow account 
  • Some let homeowner pay their insurance and tax directly. 

Types of Home Loan (Most Common)

  • Fixed-Rate Mortgage
  • Adjustable-Rate Mortgage
  • Government Guaranteed Mortgage

Fixed-Rate Mortgage

  • Interest rate remains the same for the life of the loan 
  • Stable and predictable monthly payment

Adjustable-Rate Mortgage (ARM)

  • Interest rate is flexible and subject to adjustments
  • Adjustments either on specific dates (3-, 5-, 7-year) or 
  • Adjustments based on market conditions
  • May provide with a lower rate in the beginning of the loan
  • However, the payment may increase over time 

Government Guaranteed Mortgages

  • Federal Housing Administration (FHA) loans 
  • Department of Veterans Affairs (VA) loans
  • FHA help homeowners with income restrictions 
  • VA help who are currently in the military or a veteran 
  • Lower down payment/Less restrictive qualifying guidelines
  • They do require you to meet certain criteria. 
  • Always check with the FHA or VA for complete details
  • If you may qualify for FHA/VA loan, inform your lender

Pre Qualification vs Pre Approval

  • Terms are used interchangeably
  • But they are actually very different
  • Refer next section for Details

Pre-Qualification

  • Provide to lender some basic information
  • Income, Assets, Loans & Bills etc.,
  • Lender provide preliminary estimate of qualifying loan terms 
  • Lender doesn't review your credit report 
  • Lender provides the qualifying amount only
  • The process is usually quick 
  • Won't know if Buyer actually qualify until pre-approval. 

Pre-Approval

  • Buyer completes mortgage application
  • Provides lender income documentation and personal records
  • Lender pulls and reviews buyer's  credit 
  • Extensive review of buyer's  finances and credit worthiness
  • A pre-approval takes longer than a pre-qualification
  • Pre-approval is a better commitment from the lender
  • Lender gives the amount of financing & potential interest rate
  • Buyer might even be able to lock-in the rate
  • Buyer may get an estimate of monthly payment (before taxes and insurance)

Why Get Pre-Approved ?

  • Save time by searching homes within pre-approved price range 
  • Letting sellers know you're a serious and qualified buyer. 
  • Buyers who have their financing in place are preferred

What is APR ?

  • Most home buyers only think about the interest rate
  • Lender will typically use APR (Annual Percentage Rate) 
  • The interest rate is the charge to borrow money. 
  • The APR includes interest rate and Other fees like Closing Costs
  • Other fees will be included over the life of the loan 
  • APR shows your total annual cost of borrowing
  • APR is higher than the simple interest of the mortgage
  • Important to compare lender's APR and not the interest rate
  • All lenders follow same federal rules when calculating the APR

What are Points ?

  • One point = 1% of Total Principal amount of mortgage
  • Example: For a principal of $125,000, 1 Point = $1,250
  • Ask for APR, Closing costs and points as they vary by lender
  • Lenders frequently charge points to cover loan closing costs
  • Points are usually collected at the loan closing
  • Points may be paid by buyer or seller or split between the two
  • This depend on local and state regulations as well as lender
  • Be sure to ask if there are points on your loan & the details

Pre Payment Penalty

  • A pre-payment penalty is fee charged if you pay off your mortgage early (i.e., pay off the loan before the loan term expires).
  • Be sure to ask if your mortgage contains a pre-payment penalty.  

Standard Forms

Uniform Residential Mortgage Application Form 1003

Loan Estimate – Lender must give a Loan Estimate within 3 days

Closing Disclosure - Lender must give 3 days closing date

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