Southwest Funding, L.P. - Frequently Asked Questions
Q: How do I know how much house I can afford?
A: Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend upon your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. You may also be able to take advantage of special loan programs for first time buyers to purchase a home with a higher value. Give us a call, and we can help you determine exactly how much you can afford.
Q: What are discount points?
A: Discount points are a percentage of the loan amount you can pay to reduce your interest rate. One "point" equals 1% of the loan amount. If you're going to be in your home for a relatively short period of time, it may not be worth it to you to pay discount points to reduce your rate. If you'd like to lower your monthly payment by lowering your interest rate, then paying points up front may be the best way to do this.
Q: What are origination points?
A: Origination points are a percentage of the loan amount charged by the lender to cover the cost of processing the loan. If you're willing to obtain your loan at a slightly higher interest rate, Phoenix Home Lending may be able to pay for your origination fee and closing costs. This can substantially reduce your out-of-pocket expenses when you obtain your home loan.
Q: What is "APR"? Why is it usually higher than the rate the lender quotes me?
A: APR stands for "annual percentage rate" and reflects the interest rate charged on the loan plus prepaid finance charges such as the points and financing costs you pay in obtaining the loan. To calculate the APR, first calculate the monthly payments on the contract loan amount according to the note rate agreed upon. Then borrower-paid loan costs are deducted from the contract loan amount. The contract loan payments are measured against the net amount borrowed to determine an effective interest rate or APR. The APR will generally be higher than the note rate because the payments are being measured against a lower net loan amount.
Q: How do I know which type of mortgage is best for me?
A: There is no simple formula to determine the type of mortgage that is best for you. This choice depends on a number of factors, including your current financial picture and how long you intend to keep your house. Southwest Funding, L.P. can help you evaluate your choices and help you make the most appropriate decision.
Q: Should I finance my home for 15 or 30 years?
A: Mortgages are generally paid over either a 15- or 30-year period, although terms for fewer years are available as well. And while monthly payments for a 30-year mortgage are naturally lower than those for a 15-year mortgage, a 15-year mortgage could save you a considerable amount of money in the end. Here's how:
Suppose you have a loan for a $100,000 home at an interest rate of 9%. On a 30-year loan, your payments would be $805 a month. *
For the same $100,000 loan with a 15-year mortgage, monthly payments would be $1014 a month. * If the additional $209 a month is within your means, you could save $107,096 in interest over the life of the loan.
Plus you'll end up owning you home in half the time. You should also note that 15-year mortgages can usually be obtained at an interest rate lower than comparable 30-year mortgages.
*Payment includes principal and interest only.
Q: How do I make an offer?
A: Once you have found the house you want and can afford, be sure to determine the home's true value by comparing its price to that of other houses in the same neighborhood. Your Realtor can help you with this or you might want to hire an independent appraiser to help guide you.
Once you and the seller have reached an agreement on the price of the home, you may be asked for a deposit to hold the house while the purchase contract is being prepared.
Q: Does my credit have to be perfect?
A: Your ability to purchase a home will depend, in part, on your credit history as profiled in a "credit report". The information on the credit report is an indicator of how responsible you are in meeting your obligations. You do not have to have perfect credit to be approved for a mortgage, but if you have a number of late payments, you will need to provide a letter explaining why those payments were late. It is useful to check your credit standing several months before you apply for a home loan. When you think you are ready to purchase, your mortgage loan officer will ask you to complete form authorizing them to obtain your credit report for you.
Q: Which kind of mortgage should I apply for?
A: Once you're ready to buy a home, you need a mortgage that fits your budget and your financial objectives. Some people prefer the predictability of a fixed rate mortgage. Adjustable rate mortgages (ARM) offer the possibility that your payment will go down if rates go down. Still others like the idea of paying off the mortgage sooner and saving thousands of dollars in interest and thus, opt for a shorter term.
Selecting the best mortgage loan for your needs can be confusing. It is best to consult with a mortgage loan officer prior to selecting a loan program. A loan officer can discuss your financial goals, income and expenses and help you determine the appropriate home financing option based on your needs.
Q: What information will be required when I apply?
A: A smooth and timely loan approval begins with complete and accurate information up front. So, when you meet with your mortgage loan officer, you can help speed up the process by providing the following information (use this as a checklist to get the necessary documents together):
Documents necessary for Processing Your Loan
Executed contract or deed for the property/home you're buying or refinancing
Copies social security cards for all borrowers
Copies of driver licenses for all borrowers
Copies of 30 days most recent pay stubs (keep current with your loan officer/processor) for all borrowers
Copies of 60 days most recent bank statements (keep current with your loan officer/processor) for all accounts and investments (most recent quarterly or annual if monthly is not provided)
Copies of most recent 2 years W-2 (salaried compensation) or 1099 forms and full tax returns (self emploied)
Copies of full divorce decrees and full bankruptcy papers, if applicable
List of creditors including debt balance, account numbers, etc.
Documentation of any additional income
Description of other real estate owned
Your mortgage loan officer will inform you if additional information is needed.
Q: What is PITI?
A: Mortgage lenders us the term over and over again, so it is important that you understand what it means. "PITI" is the total monthly payment you will make each month to your lender and includes principal and interest on the mortgage, real estate taxes, and homeowners insurance. If you will be paying private mortgage insurance or condo/co-op association fees, these monthly payments are also included in the "PITI" amount.
Q: What are closing costs?
A: Closing cost cover all the charges associated with the transaction, including origination and discount points, appraisal fee, title search fee, title insurance, taxes, deed recording fee, charges for credit reports, etc. Closing costs vary greatly depending upon the loan program and fees for that program.
Q: What is the difference between a fixed-rate loan and an adjustable-rate loan?
A: With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM loan will likely change. There are advantages and disadvantages to each type of mortgage, and the best way to select a loan product is by talking to us.
Q: How is an index and margin used in an ARM?
A: An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and a pre-specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR).
Q: What happens at the closing?
A: Before closing, you may want to arrange for a home inspection, make arrangements with the utility company, and obtain hazard insurance. Your loan officer can be a big help in assisting you with these details.
At signing (ah, the final step) your mortgage is signed and then at closing any check required from you is delivered. Your first mortgage payment will usually be due approximately 30 days after closing. Now you can settle into your new home.