Frequently Asked Questions (FAQs)

General Questions:

Can I get pre-approved?
Do you charge an application fee?
Do you charge for a credit report fee?
What are the different types of mortgage loans?
Do I have to pay discount points?
When should I "lock" the interest rate?
How do I reduce the amount of cash required at closing?
Do I have to establish an escrow account?
what do I need to provide for the loan approval?
What is a "No Income Verification" (NIV) loan?
What's the difference between and Equity Line vs. Equity Loan?

Credit Questions:

What is 'Perfect Credit'?
What is 'Good Credit'?
I have some 'Credit Problems'?
Should I pay off all of my debts?
Does bankruptcy disqualify me from a mortgage loan?
What is a "FICO" score?

Income Questions:

I am self-employed, does that present any problems?
Most of my income is commissions and/or bonus, does this present any problem?
Does my income have to be verified?

General Questions:

1. Can I get pre-approved (not just pre-qualified) for a mortgage before finding a home to buy?

Yes! Southwestern Mortgage Company offers you a complete credit approval prior to finding a home to buy! We recommend you getting pre-approved for the following reasons.

    A. You know exactly what you can afford and have a pre-approval letter   to submit to your realtor and your potential seller so that you can find the right property.

    B. You can usually negotiate a lower price since you are pre-approved and are similar to a cash buyer. The seller knows that the house is sold, not just under contract, contingent upon final approval.

    C. Your closing time will be shortened. Since you are credit pre-approved, all that is necessary is to get the contract of sale, an appraisal, and the title commitment. Closing can usually be done very quickly.


2. Do you charge a Loan Application Fee?
No, Southwestern does not charge an application fee. Please feel free to apply at no obligation for a no charge pre-approval of your loan request.   If the borrower decides to protect an interest rate an appraisal fee may be necessary. The typical appraisal fee is $455 for an owner coupied single family residence transcation.  However, appraisal fees can vary depending upon transaction parameters.


3. Do you charge a Credit Report Fee?
We provide you with a non chargable in house credit report. Similar to our opinion of the loan application fee, we feel that the credit report is part of our primary business, and that the expense is a general overhead item. If after reviewing that report, we will determine if the three repository merged report is necessary a $20 fee will be required.


4. What are the different types of mortgage loans?
There are many different mortgage loan products, however, they can usually be grouped into three major categories. These categories are:

    A.Fixed Rates - in fixed rate mortgages, the interest rate is fixed for the life of the loan. The amortization periods can be for:

    Ten, Fifteen, Twenty, Twenty Five, Thirty, and now even Forty Years

    B.Adjustable Rate Mortgages (ARM's) - in adjustable rate mortgages, the interest rate adjusts periodically (adjustment interval), depending on the type of ARM. Some of the adjustment intervals are monthly, quarterly, semi-annually, annually, every three years, or every five years. An ARM that has an adjustment period of once per year is called a "one year ARM".

To determine your interest rate with an ARM, you must know two things. First the Financial Index that the ARM is tied to, such as: 1.Treasury Notes (6 month or 1 year) 2.Libor rate. 3.11th Federal Reserve District Cost of Funds Index (COFI) The other item needed is the margin (amount added to the index to determine the interest rate). The more popular adjustable rate mortgages are: 1 month ARM; the rate adjusts monthly after a 3-month introduction period. 6 month ARM; the rate adjusts every six months. 1 year ARM; the rate adjusts annually.


5. Do I have to pay discount points?
NO! A discount point is equivalent to a percentage of the loan amount. While it is commonly used to lower the interest rate, it is usually optional.


6. When should I "lock" the interest rate?
This is a difficult question to answer. The question is very similar to when should you buy any given stock. Many items should be taken into consideration, including the performance of the economy. Your loan officer will be able to advise you.


7. How do I reduce the amount of cash required at closing?
Depending upon the loan-to-value (LTV) ratio, some of the non-recurring closing costs can be financed, by classifying these expenses as a "seller-contribution." Generally, if the LTV is greater than or equal to 95%, the seller-contribution is limited to 3% or less. Other wise the seller contribution is usually limited to 6% or less. Keep in mind that a seller contribution could affect the seller's net proceeds. Special programs such as the FHA with a Nehemiah grants can also reduce the amount of cash required at closing. (see programs)


8. Do I have to establish an escrow account?
Not necessarily.  Although many lenders require an escrow account for real estate taxes and insurance, there are many that allow you the option. With conventional loans, an escrow account can be waived if the loan-to-value ratio does not exceed 90%.

However, certain programs such as FHA and VA do require impound accounts.


9. Other than the application, what do I need to provide for the loan approval?
In processing an application, the processor is required to verify the income, assets, and liabilities of the prospective borrower. Therefore, while it is not required that the applicant provide the below listed items it is usually in their best interest to do so. If the items are not provided by the applicant, the processor is required to send verifications to third parties, which slows the processing time. The typical documents needed at the time of application include: Last three months statements on all deposit accounts (bank, savings, retirement, etc.) Prior two (2) years W-2 statements and 1099's. Last thirty (30) days pay-stubs. If purchasing a home, a copy of the sales contract. These items usually cover most applications. If you are self employed, then you would not have W-2's or pay-stubs. In the alternative, a copy of your prior two years tax returns and a current profit and loss statement on you business would be necessary.


10. What is a "No Income Verification" (NIV) or "Stated Income" loan?
A "No Income Verification" (NIV) or "Stated Income" loan is one that the applicants income is not verified. The applicant simply "states" his or her income on the application, and while the employment status is verified, the income information is not. Please do not misunderstand, the income is the only thing not verified, credit is still reviewed. In fact the No Income Verification or Stated Income loans are usually (but not always) reserved for those people with good credit, and usually require 20% down payments. Also, since the lender is assuming more risk (no income information at all), the loan carries a slightly higher interest rate than a loan that has full documentation of the borrowers income. This type of loan is excellent for those applicants that have income sources that are difficult to verify ( i.e., the self employed, investment income) or those applicants that do not want to go to the trouble of providing all of the documentation to verify their income.



Questions Regarding Credit:

1.What is "Perfect Credit"?
Perfect Credit would be similar to a person with the following:

    A record of paying all financial obligations on time, for many years. There should be only a few credit inquiries within the last 24 months. There should be no bankruptcies, liens, lawsuits, or divorce proceedings. There should be several loan-established credit accounts in the USA.


2. What is "Good Credit"?
Good Credit would be similar to a person with the following:

    A record of paying all financial obligations on time for the past few years. Bankruptcies and liens should have been discharged at least 24 months ago, and credit re-established. No active lawsuits, and not currently in divorce proceedings.


3. I have some credit problems, can I still get a mortgage to purchase or refinance a home?
Yes!, even if you do not have excellent or good credit, you can still obtain a mortgage. These mortgages are referred to as "sub-prime" mortgages, and a large percentage of the population have them. Sub-Prime mortgages usually require more down payment or equity, and carry a slightly higher interest rate than prime mortgages. The amount of the required down payment or equity as well as the interest rate will depend on your own particular circumstances.


4. Should I pay off all of my credit cards or other debts before I apply for a mortgage?
In most cases no! However, there are times that it may benefit you in obtaining a mortgage. After pulling your in house credit report, your loan officer can advise you as to which, if any, debts should be paid off before you start the loan process.


5. Does bankruptcy disqualify me from a mortgage loan?
No! What type of mortgage (prime or sub-prime) that you qualify for is dependent on how long ago the bankruptcy happened. If the bankruptcy was less than 24 months ago, you probably will be in the sub-prime category, otherwise, you may qualify for the prime mortgages.


6. What is a "FICO" score?
A FICO score is a credit scoring system determined by certain credit reporting repositories, and used by many ortgage companies to determine creditworthiness of an individual. The FICO score is determined by a formula that considers a persons past payment history, amount of available credit on revolving accounts vs. amount of debt, public record filings (bankruptcy, law suits, liens, judgements, divorce, etc.), number of recent inquiries, and other factors. Many mortgage companies have different FICO score requirements for certain programs.

Questions Regarding Income:

1. I am self-employed, does that present any problems?
Not necessarily. Tax returns and 1099's are the documentation of income needed for a self-employed person. The income is reviewed for the prior two years. If you have been self-employed for less than two years, there could be a problem, but solutions are available. Many times a problem arises due to the different missions of a tax return vs. a mortgage application. Most taxpayers attempt to minimize taxable income for tax purposes. However, the mortgage loan is qualified based on income, so indicating a minimal taxable income can prevent you from qualifying for as much home as you would like.


2. I am not self-employed, but most of my income is commissions and/or bonus, does this present any problem?
Not necessarily. Commission and bonus income is averaged for the prior two years and that average is used for qualification purpose. Also it may be necessary to provide some evidence that continued bonus income is probable. This is another reason for the "No Income Verification", "Stated Income", or "No Ratio" mortgage.


3. Does my income have to be verified?
Depending on the loan program that you are applying for: There are mortgages available that do not require any documentation and/or verification of income. These mortgages are known as "No Income Verification", "Stated Income", or "No Ratio" mortgages.

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California Dept. of Real Estate, Real Estate Broker/Lender 01264907 (916) 227-0931