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Mortgage FAQ

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Q: Why is my credit score important and where do I get it?

A: The three national credit bureaus (Equifax, Experian and TransUnion) capture, update and store credit histories on most U.S. consumers. Most estimate the risk a company incurs by lending you money or providing you with a service – specifically, the likelihood you will make payments. Your score is used by a lender to help determine whether or not you qualify for a mortgage, credit card, loan or service. The higher the score, the less risk you represent to a lender. Check out factors that affect your credit score or get your credit report.

Q: How do I figure out my debt‐to‐income ratio?

A: Start by calculating your debt‐to‐income ratio. Add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out. Lenders use the ratio to measure your ability to manage the payments you make every month to repay the money you have borrowed. Example:

Gross monthly income = $6000

Gross monthly debt = $2000 including:

Mortgage = $1500
Auto loan = $100
Other debt = $400

Debt‐to‐income: $2000/$6000 = 33%

Q: What is escrow?

A: Is an account set up by your lender to deposit money for taxes and insurance payments on behalf of the homeowner. A portion of your monthly mortgage payment is deposited into the escrow account for the payment of taxes and insurance. When the taxes or insurance payments come due, they will be paid from the escrow account.

Q: Why do I need Private Mortgage Insurance (PMI)?

A: Also called MI, private MI or PMI, mortgage insurance may be necessary for mortgages where the down payment is less than 20% of the property value. PMI is an insurance policy that reduces the risk a lender takes in the event that a homeowner does not repay their mortgage.

Q: What is a down payment?

A: The down payment is the percentage of the purchase price that the buyer pays in cash. Depending upon the financial institution, this percentage generally ranges from 3 to 20 percent.

Q: What is equity?

A: The value of ownership built up in a home or property that represents the current market value of the house less any remaining mortgage payments. This value is built up over time as the property owner pays off the mortgage and the market value of the property appreciates.

Q: What is Loan to Value (LTV)?

A: It's the comparison between the value of your loan and the value of your home. To calculate, you will divide the dollar amount of your mortgage loan by your home's appraised value.

Q: What is an Adjustable Rate Mortgage (ARM)?

A: A mortgage with a fluctuating interest rate. ARMs tend to have lower initial interest rates for a set period of time, and then begin adjusting according to an index. They may adjust monthly, quarterly, annually or longer.

Q: What are closing costs?

A: All the additional expenses incurred in financing and purchasing a home. These expenses typically include attorney's fees, a loan origination fee, escrow impounds, and other miscellaneous charges.

Q: What is a fixed‐rate mortgage?

A: A type of mortgage in which the interest rate does not fluctuate over the life of the loan.

Q: What is a jumbo loan?

A: For luxury or higher‐end homes, a jumbo loan generally exceeds the maximum loan amount of $417,000 allowed by most mortgage investors.

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