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Home Financing FAQs

Home Loan and Mortgage Questions

Can I finance a purchase through ForeclosedHomes.com?
Do you need credit/good credit to buy a home?
What is a credit report?
What is a credit score?
How are credit scores calculated?
What factors are used to determine credit scores?
How are credit reports compiled?
What is the average credit sore in the U.S.?
Why are credit reports important?
How do you improve your credit score?
Can I still get a house if I filed for bankruptcy?
How much mortgage can I afford?
How do I find a lender If credit is a concern?
What is a paper rating?
What is a home loan Pre-approval?
What is a home purchase loan?
What are the components of a mortgage loan?
What factors affect your mortgage payments?
What is a down payment?
What are the standard down payment requirements?
What is the Federal Housing Administration?
What is FHA Mortgage Insurance?
What does a loan insured by the FHA offer?
What is a VA loan?
What are RHS Loan Programs?
Are there any State or local housing financing programs available?
What is a Fixed Rate Mortgage (FRM) loan?
What is an Adjustable Rate Mortgage?
What are Option ARMs?
What are Hybrid ARMs?
What are low-doc or no-documentation mortgages?
What is a two-step mortgage?
What is a graduated payment mortgage?
What is a negative amortization loan?
What is a Balloon Mortgage?
What is a Subprime loan?
What are conforming and non-conforming loans?
What are Jumbo Loans?
What are B, C and D Paper Loans?

Can I finance a purchase through ForeclosedHomes.com?
ForeclosedHomes.com does not offer financing directly. Our affiliate Centro can assist you in finding the right lender. Just visit the Mortgages and Home Loans learning center and click on loan information.

Do you need credit/good credit to buy a home?
There are all kinds of loans for all different levels of credit, some lenders provide up to 100% financing. You should discuss financing questions with a qualified representative. At ForeclosedHomes.com finance and credit questions can be answered by visiting our Mortgages and Home Loans learning center.

What is a credit report?
A credit report is an ongoing record of your personal information and how you have paid your credit card debt and other bills. A credit report reveals how much debt you have, whether or not you have made your payments on time, or if you have neglected to pay off loans or credit cards. Obtain your Free Credit Report from All 3 Credit Bureaus when you try PrivacyMatters 1-2-3.

What is a credit score?
A credit score is a number that is generated by analyzing your entire credit profile. Lenders use this number to estimate risk. Credit scores range from 340 to 850. The higher your score is the less risk the lender believes you will be.

How are credit scores calculated?
Credit-reporting companies generate your credit score by inputting data from your credit report into software that analyzes it and calculates a number. Credit scores are sometimes called FICO scores because the Fair Isaac Corporation (FICO) created the software used to calculate the number.

What factors are used to determine credit scores?
The factors used and the weight each has on our credit scores are:

Payment history accounts for approximately 35% of our credit score.
Approximately 30% of our score is determined by how much we owe.
How long we’ve had credit accounts for approximately 15% of our score.
Approximately 10% is applied to time lapse since our most recent credit application.
The type of credit (installment, revolving or both) we use accounts for 10%.

How are credit reports compiled?
National credit reporting agencies compile credit reports. Data is submitted to a credit agency by creditors, the court system, public records, and by debt collection agencies. Once a notation is made on your report it will remain on the report for seven years. Bankruptcy notations can remain on your credit report for ten years. A typical credit report includes four types of information:

Identifying information comes from your credit application. This includes your name, current address, previous addresses, your telephone number, Social Security number, Date of birth, and current and previous employers.
Credit history and current obligations are reported by the credit companies you do business with. This report includes specific details about your credit cards, student loans, and other loans. This information includes your payment history during the past several years, the date opened, credit limit or loan amount, balance, and monthly payments.
Public record information comes from data collected from the court system and from debt collection agencies. This information includes bankruptcy records, foreclosures, and tax-liens for unpaid taxes, wage attachments, and monetary court judgments.
Credit inquires include the names of those who have obtained a copy of your credit report and how often you have applied for credit in the past two years.

Creditors will rely on this information to determine how likely you are to repay a loan. Remember when you apply for a mortgage you are giving the lending institution permission to order your credit report from a credit-reporting agency. You need to know what is in it before you apply for a loan.

What is the average credit sore in the U.S.?
The average credit score in the U.S. falls between 650 and 700. A credit score of 720 or higher is ideal for qualifying for a home loan. With this score you will have no problem qualifying for a home loan, and you will consequently qualify for the best interest rates and terms. It’s a simple fact that our credit score has a strong impact on our overall financial well-being. Without a solid credit score, you may be denied credit and/or pay a higher interest rate. That dramatically reduces your options should you need to qualify for a loan, particularly a home loan.

Why are credit reports important?
It is very important to know exactly what your credit reports say about your financial history before you apply for any mortgage. Credit reports play a vital role in the mortgage approval process. It helps determine what your mortgage interest rate is and any other offers the lender may give you. The content of your credit report may surprise you because errors are often found. That is why it is very important to verify that your credit report is accurate. Be sure to double check the high credit limit, total loan, and past due columns. If you haven't looked at your credit report, and you want to buy a home, now is the perfect time to do so! It's easy to obtain your Free Credit Report from All 3 Credit Bureaus when you try PrivacyMatters 1-2-3.

How do you improve your credit score?
The best way to maintain your credit score is to use it, manage it wisely, and keep a close eye on it. If you need to improve your credit score, start now! It does take time to improve. The first step to improving your credit score is to know what your credit score is. Start by obtaining a copy of your credit report. Check your report for any late payments or other credit problems that may be dragging your score down. If your credit score is low:

Start paying your bills on time.
If you have missed any payments, get current and stay current. The longer you pay your bills on time, the better your credit score.
Try to keep your credit card balances below 33% of their limits. High and outstanding dept can lower your credit score.
Pay off your debt rather than moving it around from card to card.
Do not open new accounts or close old ones, as both will negatively impact your score.
Use your credit but use it wisely and actively. Make small purchases and repay a good portion of the bill each month.
People with past credit problems tend to shy away from using their credit cards. A quick tip for the wary, if you do not use your credit you cannot improve your credit and without a good credit score you may not be able to buy that home that you have been dreaming of.

Can I still get a house if I filed for bankruptcy?
Yes, most lenders will require you to be at least 12 to 24 months removed since your bankruptcy was discharged. As a rule, most people who have filed for bankruptcy in the past will have to make a down payment of up to 30% and the interest rate may be as high as 30%. For more financing information visit Foreclosedhomes.com’s Mortgages and Home Loans learning center.

How much mortgage can I afford?
For most people who pay top dollar retail price for their homes, the question "how much home can they afford?" really means, "how big of a mortgage can they afford?" But for ForeclosedHomes.com members - who have access to top of the line real estate tools, access to over 1,000,000 listings, and toll-free live support to help them find the best possible real estate deals - the question becomes: "How much more home can I get for my dollar?" In other words, by using ForeclosedHomes.com to help find an undervalued property, your monthly mortgage payments can go a lot further than someone who pays full market value for their home.

How do I find a lender If credit is a concern?
If credit is a concern there are two ways to get a loan:

Direct to Lender means that a borrower receives their loan directly from a bank and not a mortgage broker. There are many banks that deal with C and D paper rating and even some that deal with E paper ratings. If you fall within these ratings your interest rates will be higher.
Through a mortgage broker. Because they deal with many lenders, mortgage brokers have many loan options. If you have very bad credit, find a mortgage broker that specializes in less-than-stellar credit loans. Mortgage brokers have a down side. They often charge you hidden costs and higher interest rates. Our affiliate Centro can assist you in finding a loan online.

What is a paper rating?
A paper rating is essentially a grade given that will determine your interest rate. A paper rating is based on your credit score.

What is a home loan Pre-approval?
You can get pre-approved for a loan from a mortgage lender before you have found your dream home. Having a pre-approval letter from a mortgage lender will allow you to act quickly when you find a dream home, help put you ahead of other potential bidders for the property and increases your chance to get your dream home. Our affiliate Centro can assist you in finding the right lender for you.

What is a home purchase loan?
Most people need to borrow money to buy a property. A home purchase loan is the loan a homebuyer takes out from a mortgage bank in order to pay for the property. When getting a home purchase loan, you need to consider many factors including:

The interest rate
Fixed interest rate vs. variable rate
Whether or not there are any points involved
The length of loan
Closing costs

Our affiliate Centro can assist you with your search to find the right lender for your home buying needs.

What are the components of a mortgage loan?
There are three components that make up a mortgage loan. They are:

The loan amount is the total amount being financed.
The interest rate is a monthly recurring fee that the lender charges for the borrowed funds. This fee is expressed as a percentage of the loan and is calculated yearly. The lower the interest rate agreed in the terms of your loan the lower your monthly payment.
The term of the loan is the length of time it will take to pay off the loan. A term is expressed in months or years and is determined by the borrower and lender at the time the loan is processed.

What factors affect your mortgage payments?

The amount of your down payment.
The amount of your mortgage loan.
Your mortgage interest rate.
The length of your mortgage or the repayment term of your mortgage.

What is a down payment?
It is the amount of money initially paid towards the price of the property. The down payment generally comes from the homebuyers own funds but can come from an outside sources such as from a down payment assistance program.

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What are the standard down payment requirements?
Down payment requirements vary from 5% to 20%. If you put down less than 20% you will be required to purchase private mortgage insurance. The extra insurance is used to protect the lending institution in case you fail to make your mortgage payments. The cost of the insurance will be added to your monthly payments and your closing costs. FHA and VA mortgage loans do not require the borrower to purchase private Mortgage insurance. The size of your down payment affects the size of your loan. The larger the sum of money provided in your down payment, the smaller your loan and monthly payments will be. Many lenders view large down payments as secure because the borrower has invested more of their own money in the property.

What is the Federal Housing Administration?
The Federal Housing Administration (FHA) provides mortgage insurance on loans made by FHA approved lenders. The FHA insures mortgages on single and multi-family homes, and mobile homes. Since its inception in 1934 the FHA has insured over 34 million properties.

What is FHA Mortgage Insurance?
FHA mortgage insurance provides lenders protection against loses if homeowners default on their mortgage loans. The FHA will pay a claim to the lender in the event of a homeowner defaults. Loans must meet requirements established by the FHA to qualify for insurance.

What does a loan insured by the FHA offer?

FHA insured loans have a low 3% down payment and money can come from a family member, employer, or a charitable organization as a gift.
FHA insured loans have competitive interest rates because the Federal Government insures them.
Allows a first time homebuyer, who might otherwise not qualify for a home loan, to obtain a loan because the risk is removed from the lender by the FHA mortgage insurance.
FHA insured loans are available to anyone and can be used to purchase or refinance a home.
FHA does not provide direct financing nor does it set the mortgages it insures.
FHA insured loans are assumable, allowing a person or lender to take over the mortgage without the additional cost of obtaining a new loan.
FHA insured loans may require less income to qualify, as they will exceed the conventional debt ratios.
One of the advantages of a FHA insured loan is that the credit qualifying criteria for a borrower is not as strict as conventional loan.
When compared against conventional loans, FHA insured loans have lower down payment requirements, less money required to close, and a lower monthly payment.
FHA insured loans will allow the borrower who has had some credit problems or those without a credit history to buy a home.

What is a VA loan?
The Veterans Administration (VA) has been assisting veterans in purchasing homes since 1944. The program is available to veterans, active-duty personnel, and to some members of the reserve and National Guard. The VA provides lending institutions with a guaranty that loans made to veterans will be repaid in full if a veteran defaults on their loan. The VA does not issue loans, it guarantees or insures loans provided by private lenders to eligible veterans for the purchase of a home. Veterans who receive a VA guaranteed loan are required to occupy the residence that they purchase. Veterans who qualify for a VA guaranteed loan receive these benefits:

No down payment.
Competitive interest rates.
Closing costs and VA fees can be financed.
VA loans can be assumed.
No mortgage insurance premiums.
No mortgage prepayment penalties.
Assistance to VA borrowers in default is available.

What are RHS Loan Programs?
The Rural Housing Service (RHS) of the U.S. Department of agriculture guarantees loans up to 30-years for rural residents with minimal closing costs and no down payment. Rural areas are generally defined as open country or rural towns with no more than 20,000 in population. This program was created to enable eligible low and moderate-income rural residence to purchase a home. The RHS guarantees loans made by private sector lenders. If a borrower defaults on an RHS guaranteed loan - RHS will pay the private financier for the loan - foreclose on the home, and auction the property in a public sale to the highest bidder. Homebuyers applying for an RHS loans must have acceptable credit histories, be unable to obtain a loan elsewhere, and be without suitable housing. There is no required down payment but families applying for these loans must be able to afford the mortgage payments, taxes, and insurance.

Are there any State or local housing financing programs available?
Many states, counties and cities provide low to moderate housing finance programs, down payment assistance programs, or programs tailored specifically for a first time buyer. These programs are typically more lenient on the qualification guidelines and often designed with lower upfront fees. Also, there are often loan assistance programs offered at the local or state level such as MCC (Mortgage Credit Certificate), which allows you a tax credit for part of your interest payment. Most of these programs are fixed rate mortgages and have interest rates lower than the current market.

What is a Fixed Rate Mortgage (FRM) loan?
Nearly 70% of homebuyers choose Fixed Rate Mortgages (FRM) loans. The characteristic that makes this loan type so popular is its stability. A Fixed Rate Mortgage offers an interest rate that will never change over the life of the loan, regardless of any interest rate fluctuations in the future. As a result, monthly payments on the principle and interest throughout the life of the loan, whether 30, 20, or 15 years, are also fixed for the life of the loan. With a FRM mortgage the borrower will have a predictable monthly house payment for as long as they have the loan. The term of your FRM can be 30, 20, or 15 years.

30-year Fixed Rate Mortgage gives you the maximum tax advantage by having the highest interest deduction. Your payments will be lower and your tax deductions will be higher. For foreclosure buyers who are buying a home to live in, a 30-year FRM may be your best option.
20-year Fixed Rate Mortgage has a lower interest rate than a 30-year FRM and shortens your mortgage by 10 years. This loan term is not widely offered by banks and lenders so you may have to shop around to find it. With a 20-year FRM your payments will be higher but your interest rates will be lower. The advantages of this term are that your mortgage will be paid-off earlier and equity in your home will increase at a faster rate then with a 30-year FRM.
15-year Fixed Rate Mortgage has the same benefits as the 20-year FRM. Your mortgage is paid of faster, the equity in your home will increase at a faster rate, your interest rates will be lower, and your monthly payments will be higher than a 30-year FRM.

What is an Adjustable Rate Mortgage?
Adjustable Rate Mortgages (ARMs) are loans that have an interest rate that changes periodically based on changes in a pre-selected index. As a result, the interest rate on the loan and monthly payments will fluctuate based on changing market rates and economic trends. There is always a floor cap, payment cap, and life cap on the rate. Arms initially offer lower interest rates and payments, but they don’t offer stability or a set monthly payment. While ARMs are tempting because of their initial offer of lower interest rates and monthly payments, they can prove devastating for the unprepared homebuyer. All rate increases are specified in the ARM disclosure received from the lender. Before signing an ARM agreement be sure that you read and understand all of the terms and conditions of the mortgage. An Adjustable Rate Mortgage is fine for foreclosure investors, or a short-term homebuyer but is not recommended for homeowners who plan to live in a home for a long period of time.

What are Option ARMS?
Payment-option ARMs offers the borrower the choice and flexibility but can prove costly if they don’t fully understand their options. For a set period of time, fully described and determined in the signed mortgage, borrowers can choose the type of monthly payment from four options:

A minimum payment that does not cover interest. This option increases the total loan balance.
An interest-only payment that does not reduce the total loan balance.
A payment of interest and principal that pays off the mortgage in 30 years.
A payment of interest and principal that pays off the mortgage in 15 years.

Mortgage payments are set to increase after the option period. For borrowers who choose the first payment option, payments increase before the option period ends. The unpaid interest is added to the balance of the loan so that the loan balance increases. This is called ‘negative amortization”. When the loan balance reaches a certain amount, specified in the mortgage, the payments will increase regardless of when the option period ends. The borrower must then pay higher loan payments to lower the balance of the loan. Paying only the minimum payment can increase the loan amount to the point where the borrower owes more than the home is worth.

What are Hybrid ARMs?
Hybrid ARMs can have two, three, five, or ten years of low-interest fixed-rate payments but after this period the loans reset at a much steeper rate. This can prove fatal for homeowners that cannot handle higher payments. Hybrid ARMs offer easy lending terms but include the possibility of hefty rate increases in a few short years. These loans were created for wealthy individuals with fluctuating incomes but were peddled to middle and lower income families over the past 10 during the nationwide housing boom. Hybrid ARM loans had minimal underwriting requirements that allowed borrowers to purchase homes without assessing their ability to handle payments over the life of the mortgage. In 2006 more than $300 billion and in 2007 approximately $1 trillion worth of hybrid Arms readjusted for the first time.

What are low-doc or no-documentation mortgages?
Low-doc or no-documentation mortgage applicants have to have good credit histories but their income and assets are not verified. There are three main types of low-doc/no-doc mortgages:

Stated- income mortgages: Applicants must disclose annual earnings from the last two years. Instead of backing up their income claim with pay stubs and W2 forms, the borrower might have to show tax returns, bank statements and profit-and-loss statements. The borrower must disclose their assets and debts.
No-ratio mortgages: Applicants do not declare income. No pay stubs, W2s, or tax return information is required. No debt-to-income ratio, required for most loans, is calculated. The applicant is required to list their assets and have a good credit score.
No-income/no-asset verification mortgages: Sometimes known as NINAs, these loans need the least amount of documentation. The applicant provides their name, Social Security number, amount of the down payment, and the address of the property being purchased. The lender does a credit report and a property appraisal and that is it. An excellent credit score is needed for this type of mortgage and NINA mortgages have a higher interest rate than conventional mortgages.

What is a two-step mortgage?
Combines the features of FRMs & ARMs into a 30-year mortgage. The two-step mortgage has a fixed-interest rate for the first 5 to 7 years – depending on the terms of the mortgage - and an adjustable-interest rate based on current market rates for the remainder of the mortgage.

What is a graduated payment mortgage?
Is a loan where the monthly payments increase annually for the first 5 to 7 years – depending on the terms of the mortgage – and then becomes fixed for the remainder of the mortgage. A GPM is easier to qualify for than a 30-year fixed rate mortgage because the initial payment amount is used to qualify borrowers. The downside to this loan is that even though the initial payment is less the interest owed is not. The payment shortfall is added back to the loan and can result in negative amortization.

What is a negative amortization loan?
Basically a negative amortization loan is a type of loan that does not reduce your balance. Your monthly payments are not paying back any principal, and you are not even paying enough to cover all the interest. Because your payments don’t cover the interest costs, the interest that you didn’t pay is added to the loan balance. This type of loan is basically increasing the amount you owe. The main reason this type of loan exists is to lower monthly payments and it gets borrowers into homes that they would normally be unable to afford.

What is a Balloon Mortgage?
A Balloon Mortgage initially offers a low interest rate, low monthly payments, and other flexible terms for five to seven years. At the end of the agreed upon term the entire remaining balance is due. Monthly payments remain low because they are amortized at a low interest rate for the first five to seven years. This loan type is a great deal if you plan on selling your foreclosure quickly, or if you plan on refinancing your loan before the balloon payment is due.

What is a Subprime loan?
Subprime loans have a finance rate that is higher than the prime rate offered by conventional lenders. These loans are generally offered to borrowers that have a poor credit history, no credit history, or other issues that might justify a higher rate. If you have past credit problems this may be the loan for you. Beware these loans have adjustable interest rates, monthly payments and other hidden features that might be difficult to handle at as the mortgage matures.

What are conforming and non-conforming loans?

A conforming loan is a mortgage that conforms to the government sponsored enterprises (GSEs). The GSEs are a group of financial services created by the U.S. Congress to enhance the flow of credit to the borrowing areas of agriculture, home finances and education.
A non-conforming loan is any loan that does not meet the GSEs guidelines.

What are Jumbo Loans?
Loans above the maximum loan amount established by the GSEs are known as 'jumbo' loans and are non-conforming loans. Because jumbo loans are bought and sold on a much smaller scale, they often have a little higher interest rate than conforming, but the spread between the two varies with the economy. Maximum Jumbo Loan amounts vary depending on territory. Visit Fannie Mae Territory Lookup Table for more information.

What are B, C and D Paper Loans?
B, C and D paper loans are non-conforming loans and are usually made to borrowers with poor credit. These loans are offered to borrowers that may have recently filed for bankruptcy, foreclosure, or have had late payments on their credit reports. Their purpose is to offer temporary financing to these applicants until they can qualify for conforming A paper loan financing.

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