10 MOST FREQUENTLY ASKED QUESTIONS

1. When should I lock in? Should I lock in?

This is a very difficult decision. This is up to the borrower to decide when and if to lock. The rates are subject to change throughout each business day.

2. Do I have to pay discount points?

A discount point is equivalent to one percent of the loan amount. It is commonly used to lower the interest rate and is usually optional. Unless an employer is paying discount points to lower the interest rate, we usually suggest that the borrower calculate the savings to insure it meets their needs. Federated Lending Corporation Mortgage does not require you to pay discount points on most of our refinance programs.

3. How do I reduce the amount of my closing costs?

Many closing costs such as appraisals and title company fees are determined by the companies that provide these services. Some fees such as title policy costs are set by state governments. Discount points can be reduced by going with a higher interest rate which may have some tax advantages for the borrower.

4. What is PMI?

PMI is insurance for the benefit of the lender. You pay, they benefit. If the property is abandoned or goes into foreclosure, this policy protects some of the value of the home. This policy is usually required if the LTV is greater than 80% on purchases. There are loans for 100% of the purchase price that do not require PMI, and some loans at 75% LTV do require PMI. Self insured loans are available. Consult your Federated Lending Corporation loan representative.

5. Why do I have to establish an escrow account?

Although many lenders require an escrow account for real estate taxes and insurance, there are also exceptions. An escrow account can be avoided (waived) if the loan amount is not more than 80% of the value of your home. If you bought the home within the last year, then use the sales price or the appraised value -- whichever is lower. There is a fee which is charged by the lender for the waiver of escrow.

6. Can my loan be sold?

Yes, and most loans are sold on the secondary market. In some cases the borrower is not aware of the sale because the servicer of the loan remains unchanged. The sale does not affect the terms of your note.

7. What can I do if I don't think I have enough cash?

A Federated Lending Corporation mortgage representative can help guide you to the most prudent use of resources. An example of a typical question is whether to pay off credit cards or to save the cash to be verified as cash reserves. Since there are many aspects to each person's financial situation, not all decisions can be categorized and displayed in a table.

8. What is APR (annual percentage rate)?

We are required by federal law to express the cost of credit as an annual rate.

9. How is the equity in my home determined?

Equity is the difference between the amount owed on a home and its market value. Market value is established by a licensed appraiser.

10. What is the difference between "closing" and "escrow"?

In some states, the consummation of a real estate transaction is called "escrow." In other states this same process is called "closing." Both terms mean that all funds are safeguarded (escrowed) by a reliable third party. This third party can be an escrow agent, title company, or an attorney. When all documents and funds are received, escrow is closed and funds are dispersed and title is transferred and recorded.

FOR YOUR INFORMATION

What is the difference between a Mortgage Company and a Bank?

At Federated Lending Corporation, we specialize in Home Mortgage products ­ no savings accounts, CD's, safe deposit boxes, checking accounts, etc. As specialists, we can offer better loan products at better prices than banks. We also offer many different programs that can be custom-tailored to the individual borrower. We have a multi-lender platform, in that if we don't have the best product for you, and one of our partners or investors does, we can offer their programs at no additional cost to you. Banks generally offer their own programs that are set up for the average buyer, if you don't qualify or if their program isn't the best for you - they can't help you.

When should I refinance?

People refinance for many reasons. The old adage of refinance when you can lower your rate 2% or more is not always true. There are too many factors to consider and your Loan offer can provide a free analysis to determine whether a refinance makes financial sense.

• Rate Reduction
  • Generally, if your closing expenses can be recovered within the first 30 months of the new loan, refinancing is probably a good idea.
• Mortgage Consolidation
  • If you are carrying a first and second mortgage on your home, and want to combine the two loans at a favorable rate.
• Loan Term Reduction
  • If you want to reduce the length of your loan from 30 to 15 years because you can afford the slightly higher payments of a 15-year term, you may wish to switch to take advantage of the shorter term's fast equity buildup and significantly reduced interest costs. Because the 15-year rate is about .275% to .5% less than the going 30-year rate, and because the loan principal is paid off in half the time, this is a highly cost-effective loan program.
• Tax-free Cash Via Equity
  • Many borrowers have built up significant home equity over the years through appreciation and principal reduction. These borrowers may refinance an existing mortgage to a larger loan amount, with the additional funds used for any purpose - investment, car, tuition, debt consolidation, etc. And, unlike any other consumer loan, the interest paid on the "cash out" could be 100% tax deductible! (Consult your tax advisor.)
• Switch From Adjustable to a Fixed, or to a New ARM
  • You may have an adjustable rate mortgage (ARM) you're not entirely satisfied with. Maybe the rate is higher than you like, or the potential for rate increases looms ahead. If you plan on staying in your home at least five years, now might be an excellent time to switch to the payment security of a fixed-rate loan. Or, if you plan on moving in less than three years, consider refinancing to a new ARM to take advantage of the low starting rates that may be available. Even if the new ARM's rate rises at the first adjustment interval, the starting rate may be low enough to offset any increased payment costs.
• Balloon Payment Due
  • If you have a balloon mortgage with a lump sum payment due in the near future, (or a 5/25, 7/23, 3/1, 5/1, or 7/1 combination mortgage) consider refinancing if you are comfortable with the current rate environment.

What are the different loan types?

• Fixed Rate Mortgages
  • Rates are fixed for the life of the loan and are available for various amortization periods: 15 years; 20 years; 30 years.
• Adjustable Rate Mortgages
  • 1 month COFI ARM: rate adjusts monthly after a 3 month intro period
  • 6 month ARM: rate adjusts each six months
  • 1 year ARM: rate adjusts each year
  • 3/1 ARM: rate fixed for 3 years, then adjusts annually
  • 5/1 ARM: rate fixed for 5 years, then adjusts annually
  • 7/1 ARM: rate fixed for 7 years, then adjusts annually
• Two-Steps
  • 5/25: rates adjust once at end of first 5 years then remain fixed for 25 years
  • 7/23: rates adjust once at end of first 7 years then remain fixed for 23 years
• Balloons
  • 5/25 or 7/23: rate is fixed for first 5 or 7 years. There is a conditional refinance (approximate cost $275) at the end of the initial 5 or 7 year period.
• Variations on These Loans
  • Rates can be bought up or down. Buying the rate down can be permanent or temporary.

CLOSING COSTS AND CASH RESERVES

What is my minimum out-of-pocket expense for a refinance?

Most closing costs can be rolled into the mortgage amount on a refinance so the usual out-of-pocket expense would be for 1) the credit report(s) and 2) the appraisal. These costs average approximately $440 in most states. These can be credited back at settlement.

What is the difference between closing costs and the cash reserves needed to close a transaction?

The closing costs are less than the total verified funds needed. Closing costs include points, real estate taxes, insurance premiums, survey costs, title policy costs, and several other lesser fees. Verified funds would include the closing costs plus several months of PITI. Reserves are additional funds required by various programs.

What does cash out mean?

In some circumstances a borrower may receive a new mortgage which 1)pays off the previous mortgage and 2)provides the borrower with additional cash pulled from the equity of the home.

What are "closing costs"?

The closing or the close of escrow is the last stage of the transaction of title of refinance. In most states the closing is administered by an independent, reliable third party and fees are paid for this service. Closing costs are non-recurring fees associated with the creation of a mortgage.

Can closing costs be zero dollars?

You can reduce closing costs by buying up the interest rate.

I need $12,300 for closing. I have $6,000 and my wife's mother will loan me the other $6,300 at no interest for 4 years. Do I need to document that transaction?

A gift from a parent, or other immediate family member is an acceptable form of down payment in most cases. A loan is only acceptable if there is collateral for the note other than the subject property. A personal loan is not an acceptable form of down payment. A gift is OK, usually. The borrower must have at least 5% of their own funds unless the gift represents 20% or more of the purchase price. Be honest with your Federated Lending Corporation mortgage representative.

My cash for closing is in a safety deposit box. Is that a problem?

Yes. Although it may appear to be strange, cash is not an acceptable form of funds to close when a loan from a financial institution is also needed. However, there are several loan programs that allow cash with no paper trail. These programs usually require a down payment of at least 30% of the purchase price and usually command a higher interest rate.

The house appraises for $245,000 and I have a contract to purchase it for $198,000. Can I get a loan for 95% of the appraised value?

Loans from financial institutions and many private investors will base the loan amount on a percentage of the contract price or the appraised value, whichever is lower. If you bought it for $198,000 then it is worth $198,000. Some equity lines of credit are based on appraised value.

CREDIT

What is PERFECT CREDIT?

• a record of paying your mortgage(s) or rents on time
• a record or paying all financial obligations on time for many years
• there should be only a few credit inquiries
• there should be no bankruptcies or tax liens
• there should be several long-established credit accounts in the USA
• no active lawsuits

What is GOOD CREDIT?

• a record of paying your mortgage(s) or rent(s) on time
• reasonable explanations for occasional late payments on installment and credit accounts
• there should be only a few credit inquiries
• bankruptcies or tax liens that are satisfied or paid
• reestablished credit accounts with a satisfactory payments record
• no active lawsuits

My CREDIT IS NOT GOOD. What difficulties should I expect?

• on a purchase, the down payment may need to be increased
• the interest rate may be higher (higher perceived risk)
• sometimes a second (junior) mortgage will help, especially if the LTV is lower due to the perception of a higher risk. This second mortgage is another loan against the house, but second in priority behind the primary or first mortgage. It could be offered by the seller, per program guidelines.

Should I pay off all of my credit cards before I apply for a mortgage?

Maybe not. Ask your Federated Lending Corporation mortgage representative.

My credit is perfect, but my spouse's credit is bad. Can we use my credit only?

Yes if we use your income only. Be honest with your Federated Lending Corporation mortgage representative as they can help you make this decision.

My credit report incorrectly states that I made late payments.

Please help your Federated Lending Corporation mortgage representative by providing written information that will help correct this error. Many such issues can be resolved easily.

INCOME

Last year I made $75,000: $25,000 as a base salary and $50,000 in bonus and commissions. This year so far, I have made $60,000 in commissions. How will an underwriter evaluate my income?

If your bonus or commission is 25% or more of your total compensation, the underwriter will ask for the last two years' tax returns. Your income will be very close to the Adjusted Gross Income on line 31 of page 1 of the tax return.

If you own 25% or more of the company - whether or not you get a W2 - then you are considered self-employed and your income is verified by line 31, page 1 of the IRS form 1040, or line 16 of 1040A, or line 4 or 1040EZ.

I don't want my tax returns included in the loan application. Can this be avoided?

Yes. There are loans that do not require the verification of income. There are also loans that do not require that you have a job. Your Federated Lending Corporation mortgage representative can give you the details of these programs.

My circumstances are unusual. Can I get a special loan?

Yes. Federated Lending Corporation has many special programs.

AND OTHER QUESTIONS WE'VE HEARD

What information will I need to submit with my application?

• W-2 (2 years) and current month pay stubs
• Employment Addresses (last 2 years)
• Latest 3 months statements (All accounts: bank, investment, 401K, IRA, Credit Union)
• Real Estate owned ­ addresses, balance, monthly payments
• 2 years tax returns if Self Employed or MORE than 25% of your income is commission, overtime or bonus
• Open loans ­ balances ,monthly payments, acct numbers, addresses
• 12 months rental history (canceled checks)
• Agreement of Sale

What is title insurance?

Title insurance protects the lender against loss due to problems or defects related to the title on the property being mortgaged. These problems would typically involve ownership claims against the property which were not identified by the title search. It is paid for with a one-time premium at the time of settlement.

What is a flood certification/flood insurance?

A flood certification will identify a specific property as being within or not within a flood hazard area as defined by FEMA, a federal government agency. If the property is within a flood zone, you will be required to carry flood insurance, protecting you and the lender from loss due to flood damage.

How large a down payment will I need?

In most loan programs, at least a portion of the down payment must come from your own funds. This demonstrates to the lender that your home is an investment that is important to you. For example, if the loan program you select requires a 5% down payment, and the purchase price on your home is $100,000, your down payment will be $5,000. However, you may only have to provide a 3% down payment from your own funds, totaling $3,000. The remaining 2%, or $2,000, can be a gift or grant. Some people contribute to their down payment by borrowing against the equity in their profit-sharing or 401(k) plans.

Federal Housing Administration (FHA) loans are an exception since the entire down payment may be a gift, and the Department of Veterans Affairs (VA) loans require no down payment for qualified members and veterans of the armed forces or their widows.

Does my credit have to be perfect?

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 used to determine 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 help you complete the form authorizing them to obtain your credit report for you. Getting Your Application Approved is an article that will help you understand what lenders look for when approving a mortgage application.

How do I make an offer?

Once you have found the house you want and can afford, be sure to determine the home's true value by comparing it's 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 or binder to hold the house while the purchase contract is being prepared.

Which kind of mortgage should I apply for?

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. Others need low initial monthly payments that adjustable-rate mortgages offer so they can afford more house for the money. 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.

What is PITI?

Mortgage lenders use this term over and over again, so it is important that you understand what it means. "PITI" is the total monthly payments 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.

What is a qualifying ratio?

A "qualifying ratio" is a formula used to determine your maximum PITI payment and mortgage amount and the purchase price of the home you can be approved to buy. It is important to remember that ratios may be stretched to a slightly higher amount depending upon your loan product and your other financial circumstances, referred to by some lenders as "compensating factors". Each loan product has a different qualifying ratio. There are two parts to each ratio: the front and the back.  Front Ratio: For example, the front qualifying ratio on a Federal Housing Administration (FHA) loan is 29%. (If only one number is listed, as with Department of Veteran Affairs (VA) loans only the back ratio is used to qualify.) This means that to qualify for an FHA loan, your total monthly housing payment (PITI) should not exceed 29% of your total gross (before taxes are taken out) monthly household income.  Back Ratio: The back qualifying ratio on the FHA loan is 41%. This means that to qualify for an FHA loan, your total monthly housing payment (PITI) and all other debts should not exceed 41% of your total gross (before taxes are taken out) monthly household income.

What are closing costs?

Closing costs cover all the charges associated with the transaction, including points, origination fee, appraisal fee, title search fee, title insurance, survey, taxes, deed recording fee, charges for credit reports, etc. Closing costs range between two and six percent of the mortgage amount, depending upon the loan product and fees that are customary in your region.

What happens at the closing?

Before closing, you may need to arrange for a home inspection, choose a settlement service or attorney, make arrangements with the utility company, and obtain hazard and (if necessary) mortgage insurance. Your loan officer can be a big help in assisting you with these details.  At closing (ah, the final step) your mortgage is signed and sealed, and your check is delivered. Your first mortgage payment will usually be due approximately 30 days after closing. Now you can settle into your new home.