Mortgage FAQ
What is PITI?
PITI means principal, interest, property tax and insurance. Basically the payment liability for the subject property. We normally consider the monthly payment.
How to calculate PITI?
Ex. A home is purchased at $1 million.
Customer put 20% down and get a loan for $800k. Interest Rate @ 5%, then mortgage monthly payment will be $ 1201.55 (Principal part) + $ 4166.67 (Interest portion) = $ 5368.22 (total monthly payment).
Property tax in California normally start at 1% base tax rate + special assessment etc. Normally we use 1.25% to estimate. Some area with special school tax is more expensive and might go as high as 1.75%-2.5%.
So 1.25% x 1 million (Here we just use this number for easy calculation. Normally should be taxable value =Land value +improvement value reduce home owner exemption if it’s owner occupied ) = 12500/yr.
Let’s see annual fire insurance is $600. So $50/month.
Monthly PITI ＝ 201.55 (Principal part) + $ 4166.67 (Interest portion) +12500/12 + 600/12
How much you can afford?
For non-cash buy borrower, before start looking a home, it’s very important to find out how much you can comfortably afford for or lender can approve them based on their financial situation.
Most easy way is to find a mortgage broker to help you do a pre-qualification or pre-approval which rovides you professional opinion about the maximum loan amount and interest rate customer can afford based on buyer’s monthly income, debts and credit history etc.
Some people might choose retail lender. But smart shopper always start with an independent agent. Click here for Why.
Loan Pre-qualification
Normally borrower don’t want to run credit report right away but like to have a basic idea
Experience broker can judge /analysis do-ability of the loan and give thoughts to customer
Generally will not run your credit score
Recommend to be as a good start point before you seriously pursue a deal.
Loan Pre-approval
Run through Fannie Mae or Freddie Mac approval Engine and get official pre-approval letter from this two system.
Will run your credit score and review credit history
Serious inquiry when you for sure want to pursue a house
Can avoid unknown risk about your loan and gives a peace of mind when you making offers.
Most agent and seller require it before considering your offer.
Steps for Loan Pre-qualification/Pre-Approval
Download, fill and sign Uniform Residential Loan Application
Email or fax us at (888) 296-6176 according to our loan document checklist
We will issue Pre-qualification or Pre-approval letter to you within 1-2 business days.
Whole loan broker vs retail lender
Wholesale interest rate
Flexible to choose from any lender's mortgage products
No limitation
Many creative solutions
Better service
Faster and more efficient
Which loan program should I choose?
There isn’t a single or simple answer to this question. How to choose the right mortgage for you depends on many factors:
Your current financial situation and future expectation
How you expect your finances to change
How long you intend to keep your house
How comfortable you are with your mortgage payment changing etc.
For example, a 15-year fixed rate mortgage can save you dramatically in interest payments over the life of the loan, but your monthly payments will be high. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed rate mortgage, but your payments could get higher when the interest rate changes.
The best way to find the “right” answer is to discuss your finances, your plans and financial prospects, and your preferences frankly with a mortgage professional and let he/she give you some detailed analysis.
What are popular mortgage/loan programs?
Depends on purpose of the loan, there are:
Purchase, Refinance or Cash Out Loan
Owner Occupied, second home or investment Loan
Reverse Mortgage
Depends on subject property, there are:
Residential Loan: 1-4 unit single family, townhouse, condo, multi-family etc
Commercial Loan: non-residential, mixed used, apartments, office etc commercial real estate loan
Construction Loan:
Land/Lot Loan:
Depends on Interest Rate and loan terms (Loan paid off period), there are:
Fixed Rate (10, 15, 20, 25, 30, 40, 50Year Fix) and Adjustable Rate Mortgage (1month, 6month, 1, 2, 3, 5, 7 and 10year ARM)
Fully Amortized Loan (Each installment payment include both principal & interest)
Interest Only Loan (Each installment payment pay interest only)
Balloon Loan (Pay off lump-sum principal balance at the due date)
Depends on borrower credit, income document type, etc, there are:
Verify Income or Stated Income (No need to verify income documents)
Verify Asset or Stated Asset (No need to verify asset documents)
No ratio (No need to verify DTI-Debt to Income Ratio )
No Doc (No need to verify Job )
Hard money ( Normally private loan, charge high interest, for temporary use)
A-Paper (Credit score > 660+ for Full Document Borrower or 680+ for Stated Income Borrower) or Subprime loan etc.
FHA Loan ( Down pay as low as 3%, low credit score)
VA Loan (Veteran or direct relative)
Conventional Conforming, Jumbo Conforming & Jumbo loans?
Conventional loans are secured by government sponsored entities or GSEs such as Fannie Mae and Freddie Mac. Conventional loans can be made to purchase or refinance homes with first and second mortgages on single family to four family homes.
In general, Fannie Mae and Freddie Mac’s single family, first mortgage loan limit is $417,000 in 2006. This limit is reviewed annually and, if needed, changed to reflect changes in the national average price for single family homes. The current loan limit applies to all conventional mortgages delivered after January 1, 2006.
Loan Limit
Bay Area Most City Loan Limit:
One-family loans: $484,350 High Balance: $726,525
Two-family loans: $620,200 High Balance: $930,300
Three-family loans: $749,650 High Balance: $1,124,475
Four-family loans: $931,600 High Balance: $1,397,400
Note: Maximum original loan amounts are 50% higher for first mortgages on properties in Alaska, Hawaii, Guam and the U.S. Virgin Islands.
Jumbo Loan
Loans which are larger than the limits set by Fannie Mae and Freddie Mac are called jumbo loans. Because jumbo loans are not funded by these government sponsored entities, they usually carry a higher interest rate and some additional underwriting requirements. A strategy to lower your overall interest payments if your purchase or refinance balance conforming loan is to use a combination of both first and second trust money, referred to as an 80/10/10, 80/15/5 or 80/20. Every situation is different, but it is one more option to consider.
In addition to common loan structures such as fixed rate, adjustable rate and balloon loans, Fannie Mae and Freddie Mac also have loan programs for low to no down payments, community lending and affordable housing initiatives, construction to permanent, home improvement and reverse mortgages.
Subprime Loan
If you have bad credit, you may not qualify for a conventional loan or a low down payment loan offered by FHA and VA. In this case, you may consider a subprime mortgage. Because of the higher risk associated with lending to borrowers that have a poor credit history, subprime loans typically require a larger down payment and a higher interest rate.
You should study the specific terms of a subprime loan that you qualify for to determine if it is a loan that will help your financial situation. Subprime loans are one way for you to get into the home you want at today’s price. If you already own a home, a subprime loan can give you an opportunity to clean up your credit and ultimately refinance into a lower rate at a later time. If you have a mortgage, you can look at refinancing more than what you currently owe on the house and get cash back for the equity you already have in the home. This cash out could be used to pay off higher rate credit cards, bankruptcy, foreclosure or collections and liens. It could be a good way to clean up a troubled credit history, save money each month and start rebuilding your credit worthiness.
Whether for a purchase or refinance, subprime loans should typically be used as a short term solution, approximately 2-4 years. During that time, you can work to clean up your credit and qualify or a refinance into a lower risk, lower rate loan.
Prior to 1990 it was very difficult for anyone to obtain a mortgage if they did not qualify for a conventional, FHA or VA loan. Subprime loans were developed to help higher risk borrowers obtain a mortgage. Many borrowers with bad credit are good people who honestly intended to pay their bills on time. Catastrophic events such as the loss of a job or a family illness can lead to missed or late payments or even foreclosure and bankruptcy. Now there are mortgage companies that take into consideration events outside the borrower’s control, but not without a price.
Lenders are compensated for risk in the form of interest rates. The higher the lender perceived its risk to be, the higher the rate they will charge for the privilege of borrowing their money. The lower the risk, the lower the rate. Several risk factors are taken into consideration when evaluating a borrower for a subprime mortgage, the most important being your payment and credit history.
Your debt to income level, employment history, type of property and assets are other factors that are taken into consideration when determining if you qualify for a conventional, government or subprime loan.
FHA Loans
A program that provides mortgage insurance for the purchase or refinance of a principal residence that incorporates the cost of energy efficient improvements into the loan.
VA Loans
A program that provides mortgage insurance for the purchase or refinance of a principal residence that incorporates the cost of energy efficient improvements into the loan.
Veterans who served on active duty and were discharged under conditions other than dishonorable, during World War II and later periods are eligible for VA loan benefits. World War II (September 16, 1940 to July 25, 1947), Korean conflict (June 27, 1950 to January 31, 1955), and Vietnam era (August 5, 1964 to May 7, 1975) veterans must have at least 90 days service. Veterans with service only during peacetime periods and active duty military personnel must have had more than 180 days active service. Veterans of enlisted service which began after September 7, 1980, or officers with service beginning after October 16, 1981, must in most cases have served at least 2 years of continuous active duty or the full period (at least 181 days) for which you were ordered or called to active duty and been discharged under conditions other than dishonorable, or have completed at least 181 days of active duty and been discharged under the specific authority of 10 USC 1173 (Hardship), or 10 USC 1171 (Early out), or have been determined to have a compensable service-connected disability; or have been discharged with less than 181 days of service for a service-connected disability. Individuals may also be eligible if they were released from active duty due to an involuntary reduction in force, certain medical conditions, or, in some instances for the convenience of the Government.
If you served on active duty during the Gulf War, you must have completed 2 years of continuous active duty or the full period (at least 90 days) for which you were called or ordered to active duty, and been discharged under conditions other than dishonorable; or completed at least 90 days of active duty and been discharged under the specific authority of 10 USC 1173 (Hardship), or 10 USC 1173 (Early out), or have been determined to have a compensable service-connected disability, or have been discharged with less than 90 days of service for a service-connected disability. Individuals may also be eligible if they were released from active duty due to an involuntary reduction in force, certain medical conditions, or, in some instances, for the convenience of the Government.
A veteran who doesn’t have a certificate can obtain one easily by completing VA Form 26-1880.
Veterans who served on active duty and were discharged under conditions other than dishonorable, during World War II and later periods are eligible for VA loan benefits.
Answers to commonly asked questions about VA loan eligibility.
More than 29 million veterans and service personnel are eligible for VA financing. Even though many veterans have already used their loan benefits, it may be possible for them to buy homes again with VA financing using remaining or restored loan entitlement.
To buy a home, build a home, simultaneously purchase and improve a home, etc…
The CRV (certificate of reasonable value) is based on an appraiser’s estimate of the value of the property to be purchased.
A basic funding fee of 2.15 percent must be paid to VA by all but certain exempt veterans. A down payment of 5 percent or more will reduce the fee to 1.5 percent and a 10 percent down payment will reduce it to 1.25 percent.
Veterans who had a VA loan before may still have “remaining entitlement” to use for another VA loan.
VA has provided toll free numbers for the convenience of veterans and dependents.
5 Steps to a VA Loan
Apply for a Certificate of Eligibility.
A veteran who doesn’t have a certificate can obtain one easily by completing VA Form 26-1880, Request for a Certificate of Eligibility for VA Home Loan Benefitsand submitting it to one of the Eligibility Centers with copies of your most recent discharge or separation papers covering active military duty since September 16, 1940, which show active duty dates and type of discharge.
Decide on a home to buy and sign a purchase agreement
Order an appraisal from VA. (Usually this is done by the lender.)
Most VA regional offices offer a “speed up” telephone appraisal system. Call the local VA office for details.
Apply for a VA loan.
While the appraisal is being done, the lender (mortgage company, savings and loan, bank, etc.) can be gathering credit and income information. If the lender is authorized by VA to do automatic processing, upon receipt of the VA or LAPP appraised value determination, the loan can be approved and closed without waiting for VA’s review of the credit application. For loans that must first be approved by VA, the lender will send the application to the local VA office, which will notify the lender of its decision.
Close the loan and move in.