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Home Mortgage Myths

15 Myths About Getting a Home Mortgage

During our numerous years of mortgage lending we’ve found that many people have misconceptions about home financing. We would like to set the record straight, and help you get the mortgage you need!

Please take a few moments to read the 15 mortgage “myths” listed here (most of them will probably be familiar to you!). Along with each myth, you’ll find the facts about home financing. We hope this information will be helpful to you in buying and financing a home.

If you have any questions about home financing, or would like more information about getting a mortgage, please send us an Email - or call Landmark Financial Group, Inc., 412-921-LAND (5263). You’re also invited to visit our offices at 369 Mansfield Avenue - Pittsburgh, PA 15220.

1. “I should choose a house before I choose a lender.”
   This is a very common misconception. In fact, you should choose your lender first - and find out how much house you can afford. Talk to your lender, and learn what kind and size of mortgage you qualify for - and even get mortgage pre-approval. This will save you time, give you more control over the house-hunting process, and put you in a stronger negotiating position. And...our pre-approval process is FREE!

2. “My real estate broker can help me get a good rate.”
   You should remember most real estate brokers work for the seller - not the buyer. They are real estate experts not financing experts, and they don’t (and shouldn’t) know enough about you to give you specific mortgage advice. Do your own research, and talk to a mortgage professional. Always get a second opinion, even at Landmark Financial Group we realize no one company can be all things to all people!

3. “Financing a home is an unpleasant experience.”
   An informed home buyer can have a smooth, worry-free experience. Don’t rely solely on the real estate broker for information. Take charge, ask questions about home financing, and learn all you can to avoid unwelcome surprises. We walk our clients through every aspect of the home buying process, when you have a problem or question, you only have to remember one number 412-921-LAND (5263).

4. “All lenders offer the same mortgage products.”
   This simply isn’t true. Most banks offer only a limited number of mortgage options - because mortgages are just one part of their business. We specialize in mortgages, and work hard to earn your mortgage business. Since we deal with a variety of major lenders nationally and locally, talking to us is like contacting three or four lenders at the same time - only easier! (Think of us as a travel agency for mortgages!) We can offer you variety, flexibility, and low rates that may be unavailable from other lenders. When it comes to mortgages, work with a mortgage specialist from Landmark Financial Group!

5. “Fixed rates are always best.”
   Just one more myth! A fixed rate may be ideal for one home buyer - for instance; if you know you'll only be in the house 3-5 years, an ARM may be the best thing for you. Ask about the advantages and drawbacks of all kinds of rate structures. The loan officers at Landmark Financial Group can help by discussing a variety of mortgage products with you.

6. “I always have to pay points when I buy or refinance a house.”
   This is not true. There are all kinds of mortgage products that do not require the buyer to pay points - or even closing costs! Of course there are times when paying points is the only alternative in obtaining a particular specialized product, or dealing with an existing credit issue. At Landmark Financial Group we can show you different mortgage products, and help find one to suit you.

7. “A local bank will administer my mortgage locally.”
   The truth is most lenders, including local banks, sell at least a portion of their mortgages to the secondary market. This practice helps make more mortgage money available to the community. “Local” only matters at the application and approval stages.

8. “I’m self-employed and don’t show any income. I can’t get a mortgage.”
   While this may be true in today's tightened lending environment, at Landmark Financial Group we work with a portfolio lender that may still be able to find you money for your purchase.

9. “My permanent financing has to come from my construction lender.”
   The choice of a lender is entirely up to you. And you might want to think about the permanent financing first - it could make it easier to get your construction loan. At Landmark Financial Group we’ve helped many people build a home with construction and permanent financing. We even have lenders for bridge and lot loans too!

10. “Mortgage companies don’t have competitive rates.”
    One call to Landmark Financial Group will dispel this myth! For your convenience we have posted our rates here on our Web site. These posted rates only get updated weekly though, and as rates vary on a daily basis, please call us for the most current rate 412-921-LAND (5263).

11. “There’s no competitive financing available for second homes or investment property.”
    If you want to finance a vacation home, or a residential investment property, mortgage money is available. We have investment money available with as little as 20% down!

12. “I need a large down payment to qualify for a mortgage.”
    Different mortgages have different requirements - and many of them require only a minimal down payment. Landmark Financial Group has loans that require as little as 5% down! Let us work with you to find a mortgage that fits your financial situation.

13. “My regular bank will give me the best rate.”
    When it comes time to shop for a mortgage, many people think of their local bank, where they have their checking and savings accounts, believing they’ll get a better rate because they are customers. However, your local bank probably does not have the lowest rates and you should definitely do comparison shopping. A mortgage company like Landmark Financial Group, which specializes only in mortgage products, can generally offer you lower rates, and a wider variety of mortgage options.

14. “There’s no money available for jumbo mortgages.”
    Money is available for mortgages large and small. You simply need to talk to the right lender. At Landmark Financial Group we offer the widest variety or mortgage products, and the most attractive jumbo rates in the state.

15. “I won’t qualify for a mortgage because I’ve had some credit problems.”
    Another HUGE myth! At Landmark Financial Group we understand mitigating economic or personal circumstances have made it difficult for many people to maintain perfect credit histories, so we have available a program that provide mortgage money for people who have less than excellent credit. Remember, credit is relative - what you think may be poor - our lender may think is OK!

Glossary

Abatement:
Usually refers to an initial property tax break for a predetermined period of time, given by the local county to a new home owner as an incentive to buy/build.

Acceleration Clause:
Allows the lender to demand immediate payment of the balance of the loan should you default on your payments.

Adjustable Rate Mortgage (ARM):
A mortgage that allows the lender to adjust the interest rate periodically on the basis of changes in a specified index.

Adjustment Interval:
On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment.

Amortization:
The gradual reduction of debt through periodic payments scheduled over the term of the loan.

Annual Percentage Rate (APR):
An interest rate reflecting the cost of a loan as a yearly rate. This rate is likely to be higher than the stated note rate on the mortgage, as it takes into account points and other credit costs. The APR allows borrowers to compare different types of mortgages based on the annual cost for each loan.

Appraised Value:
An opinion of value reached by an appraiser based upon knowledge, experience, and a study of pertinent data.

Assumption:
Agreement between buyer and lender where the buyer takes over the payments on an existing mortgage.

Balloon Payment Mortgage:
Usually a short-term loan involving small payments for a set period of time and one large payment for the remaining principal balance at a specified time.

Bankruptcy:
A legal proceeding in a federal court in which a debtor who owes more than his or her assets may relieve the debts by transferring his or her assets to a trustee.

Broker:
An individual in the business of assisting, arranging, funding or negotiating loans for a client, but does not loan the money himself. Most brokers deal with numerous companies and have a wider array of products than any one particular institution.

Buy Down:
When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires. Can also mean, lender will allow borrower to “buy down” the interest rate by paying points to them upfront.

Capital:
The ownership interest (stated in dollars) of the owners of an entity.

CAPS (Interest):
Consumer safeguards that limit the amount that the interest rate on an ARM loan may change per year and/or life of the loan.

CAPS (Payment):
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.

Cash Out Refinance:
A refinancing transaction in which the amount of money received from the new loan is greater than the total money needed to repay the existing mortgage(s), closing costs, points, and other liens.

Closing:
Meeting between the buyer, seller and lender escrow officer where the property and funds legally change hands. Also called Settlement.

Closing Costs:
Usually include an origination fee, appraisal fee, title search and insurance, taxes, deed recording fee, credit report charge and other costs assessed at settlement.

Collateral:
Property pledged as security for a debt.

Commitment:
An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.

Compensating Factors:
Positive characteristics of a borrower’s credit, employment, or savings history that may be used to offset high debt-to-income ratios during the underwriting phase of the loan process.

Conforming Loans:
Mortgage loans which meet the requirements for purchase by Fannie Mae or Freddie Mac.

Construction Loans:
Short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses. An end loan is generally obtained after completion.

Conventional Loans:
A mortgage that is not insured or guaranteed by the federal government.

Credit Ratio:
The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her net effective income(FHA/VA loans) or gross monthly income (Conventional loans). See Housing Expenses-to-Income Ratio.

Credit Report:
A detailed summary report of the credit, including past and current debts, employment, and residence history (as well as, judgments, tax liens, bankruptcies, and matters of public record) of an individual.

Credit Reporting Agency:
An organization that is engaged in gathering, recording, updating, and storing financial and public records information relative to payment records of individuals.

Debt:
Borrowed money with a repayment schedule.

Debt-to-Income:
Total monthly obligations divided by total gross monthly income.

Deed of Trust:
Document used in most states to secure the payment of a note.

Default:
Failure to make a payment on a debt (fiscal or money default) or satisfy requirements of the debt (covenant default). Failure to perform a contractual obligation or duty.

Deferred Interest:
See Negative Amortization.

Delinquency:
Failure to make a full payment (or payments) when due.

Department of Veterans Affairs:
Independent agency of the federal government which guarantees long-term, low or no-down payment loans to eligible veterans.

Discount Points:
See Points.

Down Payment:
Money paid to make up the difference between the purchase price and loan amount. Down payments usually are 5 to 20 percent of the sales price on conventional loans.

Due on Sale Clause:
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

Earnest Money:
Money given by a buyer as part of the purchase price to bind a transaction or assure payment. Also called Deposit or Hand Money.

Equal Credit Opportunity Act (ECOA):
Federal law requiring lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity:
The difference between market value and current loan, also known as owner’s interest.

Escrow:
Neutral third party that carries out the instructions of both the borrower and lender to handle settlement or “closing.” Escrow may also refer to an account held by the lender into which the borrower pays for tax or insurance payments.

Fair Market Value:
The price at which a property is transferred between a willing buyer and a willing seller, each of whom has a reasonable knowledge of all pertinent facts and neither of whom is under undue pressure to act.

Farmers Home Administration (FmHA):
Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

Federal Home Loan Mortgage Corporation (FHLMC):
Also known as Freddie Mac, is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

Federal Housing Administration (FHA):
A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standard for underwriting mortgages.

FHA Loan:
Loan insured by the Federal Housing Administration open to qualified home purchasers. While limited in size, they are generous enough to handle moderate-priced homes almost anywhere in the country.

FHA Mortgage Insurance:
Requires a small fee (up to 3 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount to either $2,250 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount, the more years the fee must be paid.

Federal National Mortgage Association (FNMA):
Also known as Fannie Mae. A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.

Fixed Rate Mortgage:
A mortgage that uses only one interest rate for the entire term of the mortgage; however, some fixed rate mortgages contain default rates which go into effect upon the borrower’s default on the loan.

Foreclosure:
The legal procedure where property used as security for a debt is sold or the title is taken in order to satisfy the debt after the borrower’s default.

Gift Letter:
A document to verify source of gift funds used for down payment and/or closing costs.

Ginnie Mae (GNMA):
Government National Mortgage Association. Provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

Graduated Payment Mortgage (GPM):
A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

Gross Income:
Total income before any taxes or expenses are deducted.

Hazard Insurance:
Also known as homeowners insurance, which protects the borrower and home from specified losses, such as fire, windstorm, etc.

Housing Expenses-to-Income Ratio:
The ratio, expressed as a percentage, obtained by dividing borrower’s housing expenses by his/her gross monthly income. See debt-to-income.

Installment Debt:
Borrowed money that is repaid in successive payments, typically at regular intervals, for a specific amount and term; i.e., automobile loan.

Impound:
Portion of the borrower’s monthly payment collected by the lender to pay taxes, hazard insurance, mortgage insurance, and other items as they become due. Also known as Reserves or Escrows.

Index:
The rate against which lenders measure the difference between the current rate on adjustable rate loans and that earned by other investments, which is then used to adjust the interest rate up or down (Some common index's are: U.S. Treasury security yields, monthly average interest rate on loans closed by savings and loans, and monthly average costs-of-funds incurred by savings and loans).

Investor:
Money source for a lender.

Judgment:
Final legal determination of rights between parties to a legal proceeding by a court of competent jurisdiction.

Jumbo Loan:
Loan which is larger than the limits ($252,700) set by FNMA and FHLMC. Because jumbo loans cannot be funded by these agencies, they usually carry a higher interest rate.

Lien:
A claim upon a piece of property for the payment of satisfaction of a debt or obligation.

Loan to Value Ratio (LTV):
The relationship between the amount of the loan and the appraised value of the property expressed as a percentage.

Margin:
Rate expressed as a percentage that a lender adds to the index on an adjustable rate loan to establish the 'fully-indexed' adjusted interest rate.

Market Value:
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

Mortgage Insurance:
Paid to insure the mortgage when the down payment is less than 20 percent. See Private Mortgage Insurance or FHA Mortgage Insurance.

Mortgagee:
The lender.

Mortgagor:
The borrower or homeowner.

Negative Amortization:
Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan.

Net Effective Income:
The borrower’s gross income minus federal income tax.

Non-Assumption Clause:
Statement in a loan contract forbidding the assumption of the loan without the prior approval of the lender.

Origination Fee:
Fee charged by lender to prepare loan documents, credit checks, etc.; usually computed as a percentage of face value of the loan. Also, compensation fee charged by mortgage broker to obtain a particular loan product.

PITI (Principal, interest, taxes, and insurance):
Also called monthly housing expense.

Points (Loan Discount Points):
Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount.

Power of Attorney:
A legal document authorizing one person to act on behalf of another.

Pre-Paids:
Expenses necessary to create an escrow account or to adjust an existing account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

Pre-Payment Penalty:
Fee charged for early repayment of some types loans. Usually 6 months interest on 80% of current balance.

Principal:
The balance, not including interest, left on a loan.

Private Mortgage Insurance (PMI):
For most loans over 80% loan-to-value. Lenders will loan up to 100% in some cases. With the higher LTV loans, borrowers are required to carry private mortgage insurance, which entails an initial premium and may require an additional monthly fee depending on your loan’s structure.

Realtor:
Real estate broker or agent belonging to the National Association of Realtors.

Rescission:
Law that gives the borrower 3 days after signing to cancel a contract, if the transaction uses home equity as security. Only applies to refinances.

Recording Fees:
Paid to the county for recording a home sale, thereby making it part of the public records.

Refinance:
Repayment of a debt with the proceeds from a new loan using the same property as security.

Renegotiable Rate Mortgage (RRM):
A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.

RESPA (Real Estate Settlement Procedures Act):
Federal law allowing consumers to receive and review information on known or estimated settlement costs after application and again at settlement. Requires lenders to furnish information after application only.

Reverse Annuity Mortgage (RAM):
A Mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as security.

Revolving Debt:
Credit granted to a borrower who receives purchases or services on an ongoing basis prior to payment. Repayment is typically at regular intervals but not for a specified amount or term as in Installment Debt; i.e., charge cards.

Servicing:
All steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, and property inspections.

Settlement Costs/Settlement Closing Costs:
See Closing Costs.

Shared Appreciation Mortgage (SAM):
A mortgage in which a borrower receives a below-market interest rate in return for which a lender (or another investor such as a family member or other partner)receives a portion of the future appreciation in the value of the property. May also apply to mortgages where the borrower shares the monthly principal and interest payments with another party in exchange for a part of the appreciation.

Survey:
A measurement of land, prepared by a registered land surveyor, showing location of the land with reference to known points, dimensions, and the location and dimensions of any building.

Tax Lien:
A claim against property for the amount of due and unpaid taxes.

Term:
The period of time between the commencement date and termination date of a note, mortgage, legal document or other contract.

Term Mortgage:
See Balloon Payment Mortgage.

Title:
A document that gives evidence of an individual’s ownership of property.

Title Insurance:
A policy, usually issued by a title insurance company, which insures and protects a homebuyer against errors in the title search.

Title Search:
An examination of public records to determine the legal ownership of property. Usually is performed by a title company.

Truth-in-Lending:
A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.

Two-Step Mortgage:
Mortgage in which the borrower receives a below-market interest rate for a specified number of years (usually 5 or 7 years), and then a new interest rate adjusted (within limits) to market conditions at that time.

Underwriting:
The decision whether to make a loan based on credit, employment, assets, and other factors and matching this risk to an appropriate rate, term and loan amount.

VA Loan:
Long-term, low-or no-down payment loan guaranteed by the Department of Veterans Affairs. Borrowers qualified by military service or other entitlements.

Variable Rate Mortgage (VRM):
See Adjustable Rate Mortgage.

Verification of Deposit (VOD):
Form signed by the borrower’s bank or lender verifying the status and balance of financial accounts.

Verification of Employment (VOE):
Form signed by the borrower’s employer(s) verifying his/her position and salary.

Verification of Mortgage/Rent (VOM/VOR):
Form signed by the borrower’s mortgage company or landlord verifying his/her payment history.

Wraparound:
When an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.