Conforming

• What is the difference between a conforming and a non-conforming (a.k.a. jumbo) loan?

• Effective February 13, 2008 and until December 31, 2008 the difference between a conforming and non-conforming (or jumbo) loan is now defined as follows: as part of the federal government’s 2008 economic stimulus plan, the conforming loan limit which was previously capped at $417,000 for a single family home has now been temporarily increased to 125% of a metropolitan area or region’s median home price as defined by HUD*.  The maximum allowable loan limit is $729,750 for homes at the highest end of the median price spectrum and at the lowest end not less than $417,000.  This temporary increase applies to both purchase and refinance loans.  Therefore any loan amount which exceeds 125% of a region’s median home price would be classified as a non-conforming (or jumbo) loan.  Please refer to the Department of Housing and Urban Development* (HUD) website for more information on the median home price in your region or area: http://www.hud.gov/

Down Payment

• What is the minimum down payment required to buy a home?
• There are loan products which require no down payment and are 100% lender financed. There are also products permitting to be in the form of gift funds provided by a relative. 
• What is the minimum down payment typically required to purchase an investment or rental property?
• The down payment requirement can vary depending upon how tight money is in the economy at the time you are purchasing and can also vary amongst lenders. For example, lenders who underwrite their loans to meet Fannie Mae's and Freddie Mac's guidelines may require a 20-30% down payment (although there have been times when they required as little as 10% down). But portfolio lenders (i.e. banks & savings banks) may have looser down payment restrictions. Check with your loan coordinator, but the typical down payment required to receive the best non-owner occupied rate would be 20-30%.
• Is it best to put down as much money as possible (or as little) towards the down payment?
• This is a question that has been debated amongst tax specialists because of the IRS rules regarding the mortgage interest tax deduction. Please consult with your tax advisor if you have sufficient funds to make a sizeable down payment but are analyzing whether or not it is advisable to do so. Also see our link to the IRS website and related mortgage interest bulletins so you may read more about this subject.
• Is it possible to borrow 100% of the purchase price?
• Yes. It is possible to get either a 100% 1st mortgage or a 100% combination of a 1st and 2nd mortgage (i.e. an 80% first and a 20% second).
• Is it possible to get a gift from a relative for 100% of the down payment?
• Yes. A relative may provide 100% of the down payment as a gift, but the lender will likely ask that a letter be signed by the donor relative stating that the gift funds are not expected to be repaid. Also many loan products require a 20% down payment if the source of the down payment is exclusively from gift funds. Although it is worth noting that many portfolio lenders (i.e. banks & savings banks) may have smaller down payment requirements when the source is a gift from a relative.
• Can I borrow the funds for the down payment?
• Yes. It is possible to borrow against an asset that you currently own for the down payment. For example you can borrow against your 401(K), assuming that your company plan permits it, and you could also borrow against your current residence to purchase a new one (i.e. a bridge loan or an equity line). You may also borrow against your fully invested stock portfolio, avoiding the tax consequences of selling prematurely.
• Is it possible to borrow against (or liquidate) my 401(K) or IRA for a down payment and if so is this a good idea?
• Yes. You may borrow against your 401(K) to purchase a home as long as your company plan permits it. You may also cash out of your retirement account and pay penalties and withholding taxes if you prefer. Whether or not it is advisable to do so depends on how long it will take to either repay the debt (if you plan to borrow against it) or whether you look at a home purchase as an investment or a place to live (if you plan to liquidate). If a home is an investment, do you believe that you can achieve greater appreciation of these funds in real estate or in some other investment vehicle. If you plan on purchasing property as a place to live, then perhaps borrowing funds for the down payment or saving and postponing your purchase would be preferable to liquidating and paying taxes and penalties on your retirement accounts.

Finding an Agent

• Do I need a real estate agent and how do I go about finding one?
• With advances in on-line resources available today, many buyers question whether they should work with an agent. But an experienced agent earns his or her commission. In a fast moving real estate market, a good agent may learn of real estate listings before they hit the general market and can always ease the way in working with a seller and his listing agent (both at the time an offer to purchase is made as well as throughout the escrow process). When selecting an individual realtor, good questions to ask relate to experience, special education and certifications they have received, references, also check the Illinois Department of Financial and Professional Regulations to verify the licensure and record of an agent. Additional sources of referrals are friends, co-workers and neighbors who have recently sold or purchased property.
• Is it important to find an agent that works primarily in the neighborhood where I would like to live?
• If you seek the assistance of a selling agent, (an agent who works with buyers rather than sellers) they frequently work with buyers who do not always know what area they would like to concentrate their search in and therefore these agents become familiar with a wider range of neighborhoods. It may be advisable to select an agent who is familiar with the county you are searching within. Although when listing a property for sale, an agent with a thorough knowledge of a particular neighborhood may produce the best results.
• How will my real estate agent (or builder) and my lender work together to coordinate the closing?
• Good real estate agents and builders keep in close contact with all parties involved in a transaction. In a typical sale, purchase contract contingencies (i.e. financing, inspections) require that an agent or builder's rep communicate well with all parties to ensure that the contingency deadlines are met. The real estate agents, builder, loan agent and escrow officer are dependent upon one another to close a transaction (no one gets paid until closing occurs) as well as for the referral of future business, so it is in their best professional interest, as well as their clients, to communicate with one another. Of course it is always a good idea for a buyer/borrower to keep in close contact with each of these service providers for a status and progress report.
• Must I obtain financing from the lender my real estate agent (or the builder) recommends?
• You are never required to use the referred (or preferred) lender of a real estate agent or builder. Most real estate agents will provide their clients with 2-3 potential sources for financing, typically agents have access to an in-house lender as well as several outside lenders who they have had good experiences working with. The referred lenders may or may not offer the best array of loan products or the lowest rates. It is always a good idea to do some loan investigating on your own and if you find that the referred lenders do offer competitive pricing then you can make both yourself and your agent happy. But if you have a complicated transaction (i.e. an unusual property) or if you have problems with your loan application (i.e. bad credit), you must be certain to disclose everything to any potential lender you communicate with to be are certain you are making an "apples to apples" comparison of lenders. Large builders often have their own mortgage companies or affiliated financing partners who they prefer buyers within their developments use; sometimes the builder will offer loan closing cost concessions to buyers who opt to work with their preferred lender. But the same common sense would apply, do your homework carefully before committing to any lender and always be careful when shopping that you are making a valid loan comparison (i.e. same rate, points, closing costs, rate lock duration, etc).

First Time Buyers

• I am a first time buyer, what is the best way to get started looking for a home?
• The first step a potential buyer should take is to get pre-qualified by a lender so that you know how much you can afford to purchase before starting to actually look at property. After pre-qualified, the next step would be to locate a real estate agent or reliable internet resource that can help you determine where and what you would like to buy. Please refer to the Pre-Quailification section of our website.
• What is the difference between loan pre-qualification and pre-approval?
• A pre-qualification occurs when a prospective buyer discloses, either verbally or by providing documentation of, their income, assets and credit so that a loan agent may determine the loan amount that a buyer could likely qualify for based on standard lending guidelines. A pre-approval involves an underwriter (the lender's risk evaluator) actually reviewing a prospective buyer's loan application with a formal credit determination occurring that is subject to an appraisal, title report and purchase contract, along with whatever supporting documentation the underwriter may request.
• Is it necessary to get pre-qualified before making an offer on a property?
• It is always a good idea to have a lending professional or service evaluate your finances and render a determination of your loan qualifications prior to actually looking for property. To avoid frustration, before setting out to make an offer, know what loan amount you could likely qualify for.
• Is it necessary to get pre-approved before making an offer on a property?
• In a seller's market, where multiple offers commonly occur, it is a good idea to go through the loan pre-approval process prior to submitting an offer to a potential seller. Prospective buyers who do not take the time to become pre-approved are severely handicapping themselves in a seller's market.
• How long does it take to get pre-qualified or pre-approved for a loan?
• Loan pre-qualification can occur in a matter of minutes, in the time required to communicate your financial circumstances to a lending professional so they can crunch the numbers. Loan pre-approval could involve more time up to 1-3 days to gather the applicant's income, asset and credit documentation and to have an underwriter review it. Whether you are requesting a pre-qualification or pre-approval, ask for it in writing. Both your real estate agent and a potential seller will want a letter from your lender.

Flood Insurance

• Will I need to get flood insurance coverage to close the new mortgage?
  • The lender should not ask you to obtain a flood policy unless your property is located in a flood hazard zone.

Homeowner's (aka Hazard) Insurance

• How much Homeowner's insurance coverage will I need to close the new loan?
  • A safe bet is to buy a guaranteed-replacement-cost policy that will generally pay out 20-50% more than the face value of the policy to rebuild your home (this is also the preferred policy of lenders). A replacement-cost policy typically adjusts the amount of insurance each year to keep pace with rising construction costs in your area. It is important to note that local building codes require structures to be built to specific standards which could vary over time, if your home is severely damaged, you may be required to rebuild it to current codes. Even guaranteed-replacement-cost polices do not always cover this expense. However, many insurers offer an endorsement that will pay for the upgrading cost, it is a good idea to consider adding such an endorsement to your replacement-cost policy.

Insurance

• What is mortgage insurance and am I required to have it?
• Mortgage insurance (MI) is paid by the borrower to protect the lender against payment default on the mortgage and is required when only one lender is financing in excess of 80% of the value or purchase price of a property. It can also be required at other times if the lender perceives a higher risk associated with a particular loan program. There are financing options limited down payment borrowers can employ to avoid mortgage insurance for example, obtaining both a 1st and a 2nd mortgage rather than applying with one lender for a 1st mortgage over 80.00%.
• Is mortgage insurance something that I should avoid if possible?
• In July of 1999, legislation became effective which requires mortgage insurance (MI) companies to terminate their borrower paid insurance policies once a borrower's loan balance reaches 78% of the original property value (there are exceptions to this law, i.e. lender paid (MI), so read your mortgage insurance disclosures carefully). It is important therefore to weigh whether it is cost effective to pay the mortgage insurance premiums for a period of time until one has sufficient equity to remove it or to make monthly payments on a higher interest second mortgage for a term of 15 to 30 years. Of course tax considerations should also be examined as interest on a second mortgage is more likely to be tax deductible than a policy of mortgage insurance. Consult your tax advisor and please use our link to the IRS website for additional information.
• How can I avoid having to get mortgage insurance on my loan?
• Many borrowers who have less than a 20% down payment, choose a combination first and second mortgage (referred to as a piggyback loan) to avoid mortgage insurance (MI). The most common method of financing without MI is an 80-10-10 (an 80% 1st mortgage, 10% 2nd mortgage & a 10% borrower down payment). Also available is an 80-15-5 (requiring an 80% 1st mortgage, 15% 2nd mortgage & a 5% borrower down payment).   
• If I do get mortgage insurance, how can I eliminate it?
• In July of 1999, legislation became effective which requires mortgage insurance (MI) companies to terminate their borrower paid insurance policies once a borrower's loan balance reaches 78% of the original property value (there are exceptions to this law, i.e. lender paid (MI), so read your mortgage insurance disclosures carefully). Borrowers are entitled to receive a refund of the unearned portion of the premium they paid once the mortgage insurance policy is canceled. Additionally, all loans with borrower paid mortgage insurance polices which closed on or after 7/29/99, lenders are required to notify borrowers annually of their rights surrounding the cancellation process. 
• What is Homeowner's (aka Hazard) insurance?
• Homeowner's insurance protects both the owner as well as the lender against the occurrence of physical damage to the property (i.e. fire or burglary). Some perils are not generally covered by the standard homeowner's polices, for example floods and earthquakes. Also, properties located in areas prone to fires and windstorms may have difficulty obtaining standard insurance policies.
• How much Homeowner's insurance coverage will I need?
• A safe bet is to buy a guaranteed-replacement-cost policy which will generally pay out 20-50% more than the face value of the policy to rebuild your home (this is also the preferred policy of lenders). A replacement-cost policy typically adjusts the amount of insurance each year to keep pace with rising construction costs in your area. It is important to note that local building codes require structures to be built to specific standards which could vary over time, if your home is severely damaged, you may be required to rebuild it to current codes. Even guaranteed-replacement-cost polices do not always cover this expense. However, many insurers offer an endorsement that will pay for the upgrading cost, it is a good idea to consider adding such an endorsement to your replacement-cost policy.
• Must I also have earthquake insurance coverage?
• The lender should not ask you to add quake coverage to your standard policy unless your property is located in an earthquake hazard zone.
• Must I have flood insurance coverage?
• The lender should not ask you to obtain a flood policy unless your property is located in a flood hazard zone.
• What is title insurance and why do I need it?
• Before you purchase a property or close on a new loan, it's essential to know that the title to the property will be free and clear, free of prior defects and indebtedness. A homeowner and prospective lender need to be certain that what is available on the property is what is referred to as a "marketable title". A title company researches the legal history of the property which entails searching public records in the offices of the county recorder. Problems with the title could threaten the mortgage, limit ones use and enjoyment of the property and could result in financial loss. A policy of title insurance protects a homeowner's title and the insurer covers the cost of any legal challenges.
• What is the best way to shop for insurance?
• A reliable method of shopping for both homeowner's and earthquake insurance is to get estimates from at least three high-rated companies. Be prepared to discuss the type of policy you want as well as the coverage limits you require You may check insurance company ratings at the following websites: www.ambest.com and www.insure.com . If you find you are in need of flood insurance, you may contact the National Flood Insurance Program at (800)638-6620 for a quote.
  

Investment/Rental Property

• When purchasing investment or rental property, what is the difference in rate for non-owner occupied vs. owner occupied financing?
  • Conforming non-owner occupied rates are typically 3/8% higher than owner occupied interest rates. The equity requirement is usually higher for non-owner occupied mortgages as well, typically 20-30%+.
• What is the minimum down payment typically required to purchase an investment or rental property?
• The down payment requirement can vary depending upon how tight money is in the economy at the time you are purchasing and can also vary amongst lenders. For example, lenders who underwrite their loans to meet Fannie Mae's and Freddie Mac's guidelines may require a 20-30% down payment (although there have been times when they required as little as 10% down). But portfolio lenders (i.e. banks & savings banks) may have looser down payment restrictions. Check with your loan coordinator, but the typical down payment required to receive the best non-owner occupied rate would be 20-30%.

 Loan Amount - conforming vs. jumbo

• What is the difference between a conforming and non-conforming (aka jumbo) loan?
• A conforming mortgage is one that does not exceed the maximum mortgage limit of the two primary GSE's (Government Sponsored Enterprises), Fannie Mae and Freddie Mac. The current conforming maximums are: $417,000 for a 1 unit property, $533,850 for a 2 unit property, $645,300 for a 3 unit property and $801,950 for a 4 unit property. These maximums apply to all states except Alaska and Hawaii. Therefore a jumbo mortgage is one that has a mortgage amount exceeding the aforementioned limits. The interest rates on jumbo mortgages are typically between 1/4-5/8% higher than on conforming mortgages.
  

Loan Documentation

• What documentation will the lender typically require to process my mortgage?
  • The answer depends upon the quality of your credit and the amount of equity you have in your property. On a typical fully documented mortgage application (where an applicant is seeking to qualify based on an employee's salary), the lender will require: one month's current pay stubs, W-2's for the prior two years and bank and investment account statements for the prior 2-3 months. If an applicant is self-employed (has a 25% or greater ownership in a business) then additional documentation could be required (i.e. 1040's, 1165's, 1120's, P & L statement).
• Are there limited documentation (a.k.a. EZ doc, no income qualifier) loans available?
  • Yes there are many. They come in a variety of programs; some have self-employment, credit, equity or asset requirements so it may be advisable to have a mortgage consultant direct you to the appropriate product for your needs. There are also mortgages available to individuals who cannot verify either their income or assets (referred to as NINA mortgages). Keep in mind that these products can carry higher interest rates than that of a mortgage that is fully documented. A good rule to remember, the more documentation a borrower can provide for a lender, the lower the rate they will typically get.

Loan Selection

• What is the most important consideration when selecting a loan?
  • Please see Loan Programs on our website.
• How do I determine which mortgage program is best suited for my personal situation?
  • Please see Loan Programs on our website.
• What is a mortgage prepayment penalty and is it generally advisable to get a mortgage that has one?
  • A prepayment penalty on a mortgage allows the lender to charge a borrower additional interest, typically six months worth, when a mortgage is repaid during the penalty period, which is usually somewhere in the first three to five years of the mortgage. If a mortgage does have a prepayment penalty, this is clearly stated within the mortgage disclosures, mortgage note or prepayment penalty rider to the note. The advantage of taking a mortgage with a prepayment penalty is that it could carry a lower rate of interest or you may be permitted to take a mortgage without paying for non-recurring closing costs.

Making an Offer

• I already own a home and I am looking to move up, do I need to sell or list my current home prior to making an offer on a new property?
• In the current seller's real estate market, many buyers searching for property do not have the luxury of making an offer contingent upon the sale of their current residence. The solution may be either equity or bridge financing for those buyers who need the sale proceeds from their home in order to buy a new residence. These loans would be secured against their existing residence and would provide interim financing for the new residence until the property is actually sold. If a buyer does not need the equity from their current residence in order to purchse a new residence and they can qualify for a new loan carrying both the mortgages on the existing and the new residence, they could elect not to sell their existing residence or could choose to rent it.
  

Mortgage Insurance

• How can I avoid having to get mortgage insurance on my loan?
  • Many borrowers who have less than 20% equity in their homes, choose a combination first and second mortgage (referred to as a piggyback mortgage) to avoid mortgage insurance (MI). The most common method of financing without MI is an 80-10-10 (an 80% 1st mortgage, 10% 2nd mortgage with 10% equity). Also available is an 80-15-5 (requiring an 80% 1st mortgage, 15% 2nd mortgage with 5% equity).

Neighborhood Information

• How do I find out information about local neighborhood schools?
• If you are working with a real estate agent, your agent should have information on the school test scores in your selected area. You may also contact the neighborhood schools directly for information. Comprehensive on-line resources for school information are at www.theschoolreport.com and www.greatschools.net.
• How do I find information about specific neighborhood statistics (i.e. population, crime, local services, etc.)?
• Your real estate agent should be very helpful in responding to this type of information request from you, but an additional on-line resource is www.dataquick.com/consumer/ provided by Mortgage Market Information Services, Inc. (or you may contact them at 630-834-7555).

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