The Mortgage Industry Explained
US Mortgage Corporation (NMLS ID#3901). Corporate Office is located at 201 Old Country Road, Suite 140, Melville, NY 11747; 631-580-2600 or (800) 562-6715 (LOANS15). Licensed Mortgage Banker-NYS Department of Financial Services- AK, AL, AR, CA, CO, CT, DC, DE, FL, GA, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MI, MN, MS, MT, NC, ND, NE, NH, NJ, NM, OH, OK, OR, PA, RI, SC, SD, TN, TX, VA, VT, WA, WI, WV, WY State Banking Departments/Regulators. Rates, fees and program guidelines are subject to change without notice. Some loans arranged through third parties. First mortgages only. Not all products and/or programs are available in all states. Certain restrictions may apply.
Table Of Contents What Is A Mortgage... Page 01 The Factors/People Involved In A Mortgage Process... Page 03 Types Of Mortgages... Page 05 Refinancing Your Mortgage... Page 07 All You Need to know about reverse mortgages... Page 09
What Is A Mortgage? Mortgage is a way of financing purchase of a property. If you apply for a home loan to purchase a home, apartment, or plot for residential purpose, the mortgage is called a residential mortgage. A mortgage taken out for commercial properties such as factories, offices, malls, etc., is called a commercial mortgage. If you wish to buy a property, you can approach a bank or any other lender to finance you for your purchase. The loan will include a principal 01 www.usmortgage.com
amount (total money that you borrow) on which you will be charged an interest over a period of time. The property that you buy will be held as security for the loan you borrow. If you default on the loan, the lender may foreclose on your property. If you have taken a loan on your property, you will be obliged to make monthly mortgage payments until the time that the entire loan is repaid. The mortgage agreement ends only when the loan is paid or when the property is foreclosed. The borrower always has the legal rights and can reside on the property during the period of the mortgage agreement. But, if you default on the loan, the lender will have to take full ownership of the property, evict you, and sell it to redeem the balance amount. Mortgage is a very tricky process and includes many important factors. The following chapters will explain more on the subject. www.usmortgage.com 02
03 www.usmortgage.com The Factors/People Involved In A Mortgage Process
You have to think of financing your home purchase well before the day of purchase. When you seek a home loan, there are many factors that play a role in your loan application. Let us look at some of these factors in detail. Credit Report Or Credit Score This is a major factor in your loan application process. In order to weigh your finance options, make a request for your credit report in advance of your purchase. You can get your credit report for free every year from any of the three credit bureaus - TransUnion, Equifax, or Experian. You can get it online by applying on the Annual Credit Report website. Borrowers with higher credit scores are more likely to get pre-approvals on their mortgage loans than those with lower credit scores. The higher credit score holders can get the loans at lower interest rates with flexible terms of payment. Lenders are often hesitant to provide loans to low credit score holders, as they are more likely to default on their payments. If you have a low credit score, it is a better option to approach mortgage lenders or brokers. Mortgage Broker Do not confuse a broker with a lender. A broker is merely a liaison between buyers and lenders. He or she can help you find the best mortgage deals, find the right lender, and fill out the necessary paperwork for a mortgage application. Brokers are not involved in loan approval process. They just assist you with your application, as most first-time buyers are unaware of the mortgage process. If you wish to finance your purchase with a loan, your real estate agent can guide you through the process. Mortgage Lender Typically a mortgage lender can be any financial institution. Banks are usually restricted in their lending processes and are open only to those borrowers with a good credit report. Even if banks may offer loans to not-so-good credit holders, they charge a heavy interest on the principal amount. Down Payment In most cases, a seller will set a deadline for the purchase of a property. You will be one of the bidders who can negotiate an agreeable price with the seller. If the seller and you reach an agreement, you can sign to purchase the property by making a down payment of 1-10% on the price of the property. You will then be given a grace period when you can make arrangements to fund your purchase. Mortgage Limits Most times you might have to fund a certain percentage of your purchase on your own while the rest will be covered by the mortgage loan. If you do fund a part of your purchase on your own, it would help you reduce your mortgage payments. Interest Rates On Mortgage Loans Lenders try to make money by offering loans. This is accomplished by charging an interest on the principal amount of the loan. The interest rate is usually known as APR (annual percentage rate). It may be fixed or can vary according to the type of lender and credit scores of borrowers. www.usmortgage.com 04
Types Of Mortgages Mortgages are classified based on the type of interest rates charged on them. Depending on the state laws, increase in interest rates, changing terms in loan agreement, and lender policies, there are many types of mortgages. However, the amount to be paid monthly is altered over time. Adjustable-Rate Mortgage An adjustable or variable rate mortgage is a type of loan where the interest rates are adjusted periodically. It may be defined or discrete. 05 www.usmortgage.com
Graduated Payment Mortgage In this case, the interest rate on the loan remains the same. But, the amount to be paid monthly is altered over time. This accelerates the payment process and reduces the period of the mortgage agreement. Fixed-Rate Mortgage The interest rates on the mortgage loans remain the same throughout the mortgage agreement period. The mortgage payments are fixed for every month without any variation throughout the payment period. Participation Mortgage When two or more people hold equity on a property, the mortgage loan offered is charged with a participation interest where the interest rates depend on the share of the property owned by each of the members. If the party defaults on the payment, the lender sells all the shares of the property to redeem the remaining debt. It may have a balloon payment, interest, and principal payments. Sometimes the terms of the loans may not include all these payments. The terms are altered in case of a group purchase. www.usmortgage.com 06
Refinancing your Mortgage 07 www.usmortgage.com
You may get a chance to pay off your existing mortgage early with a new mortgage if the interest rates reduce or if the terms of the existing mortgages are changed. Refinancing options can be provided for many reasons, including changes in your credit report, changes in lender policies, and other such factors. You can take advantage of this situation to reduce your burden in paying off your debt. Here is how you can use refinancing in ways that can be useful. You can take a new mortgage to pay off your existing mortgage at lower monthly payments. You can repay your debt in a shorter period of time using a loan at lower interest rate. You can combine all your existing debts in one and repay them using a new single mortgage with lower interest rate, flexible terms, and shorter term of payment. You can change the structure of your mortgage plan, like shift from adjustablerate to fixed-rate mortgage. There are fees for transaction if you wish to refinance your loans. If you clear your fixed-term loans well before the deadline, you might encounter the consequences of penalty clauses included in the terms of the loans. You will have to review your options very carefully before deciding to refinance, as it may involve huge costs for the process itself. Refinancing loans are of two types. If your home is worth more than the debt you owe to the lender, you can opt for the cash-out refinance loan. You can use the additional value of your house as collateral for the new loan. If your home is worth less than the debt you owe, you can opt for a cash-in refinance loan. Here, you can pay the lender a part of the debt to get a better mortgage rate. www.usmortgage.com 08
09 www.usmortgage.com All You Need To Know About Reverse Mortgages
Reverse mortgage is a loan for senior citizens where you can acquire a part of the equity value of your property. You can receive a monthly income from a principal sum for your lifetime at the end of which, the lender can sell the property to redeem the loan amount. A homeowner or a borrower is not required to make any mortgage payment to the lender. The accrued interest on the principal amount is added to the balance of the mortgage amount. A homeowner can retain rights to the property for a lifetime after which, depending on whether the loan has been repaid, the lender will sell the property and redeem the balance. If the property has accumulated equity over time, a homeowner can obtain another mortgage for the increased value. Eligibility For Reverse Mortgage In The USA You must be a minimum of 62 years of age to acquire a reverse mortgage. You must also reside on the property for as long as the reverse mortgage is in function. You must be able to repay pending loan balances with the income from the reverse mortgage. There are no credit or minimum income requirements. The income from reverse mortgage will not be taxable. You have to attend a counseling session with an FHA approved counselor so you can understand all the terms of the mortgage. Limit Of A Reverse Mortgage There is a maximum loan limit of USD625500 that you can borrow through a reverse mortgage. However, if the value of your property exceeds this amount, you can opt for a Jumbo loan. Jumbo loan is not insured by the FHA and might include charges higher than the charges included for a conventional reverse mortgage Factors Involved In Allocating Amount Of Reverse Mortgage There are a few factors that determine the loan limit available to a borrower. They are: Age of the borrower If you are older, it is likely you will receive a larger amount. Value of the property The value of your property will be estimated based on market value, condition of the property, expenses for property maintenance and existing property liens. If the property value if high, you would get a higher principal amount. Type of income through mortgage Depending on the type of withdrawal you choose from monthly income, line of credit or as a complete amount, the loan will be awarded to you. The loan would have to be paid in full upon your death including the interest and all charges incurred during the processing of the loan. If the payment is not made by any of your family or friends, the lender would sell your property to cover the costs of the loan. If there is a balance amount from the property sale, it will be distributed according to the terms stated in your will. www.usmortgage.com 10
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The Mortgage Industry Explained www.usmortgage.com 12
Corporate Office 201 Old Country Road, Suite 140 Melville, NY 11747 On US: 800-Loans-15 Info@USMortgage.com www.usmortgage.com 1994 2014