Mortgage Basic Terms

• Interest Rage refers to the percentage of your outstanding loan balance that you pay the lender each month as part of the cost of borrowing money. Your interest rate will be based on the current overall rate environment, as well as your financial profile and the specific features of your loan.

• Discount Points allow you to buy down your interest rate at closing. One point equals 1% of your loan amount, and the more points you pay, the lower your interest rate will be, and the less you will have to pay each month. How much your rate will decrease with each discount point you pay will depend on the specific features of your loan.

• Origination Charge is one amount that includes all charges (other than points) that all loan originators (lenders and brokers) involved in the transaction will receive for originating the loan. This includes any application, processing, and underwriting fees, and payments from the lender to the broker for origination.

• Your Monthly Mortgage Payment

  Generally, mortgage payment includes principal, interest, taxes, and insurance (PITI).

  • Principal refers to the amount of money you borrow to buy a home, and to the outstanding loan balance at any point during the mortgage term.
  • Interest is the interest charged on borrowed money. This amount is determined by your interest rate.
  • Taxes assessed by your local government or county will likely be collected by your lender as part of your monthly payments, and then paid annually or semi-annually on your behalf. This process is known as an escrow.
  • Insurance, like property taxes, is normally collected by the lender in an escrow account. Insurance offers financial protection, and has two major components:
    • Homeowner's insurance, also called hazard insurance, protects you against damage to your property caused by fire, wind, or other hazards.
    • Mortgage insurance protects your lender in the event that you fail to repay your mortgage. Whether you must pay mortgage insurance usually depends on the loan program and the size of your down payment.
   
  Loan Types
  Most home loans fall into one of two general categories: fixed-rate and adjustable-rate mortgages (ARMs).
  • Fixed-rate mortgages have interest rates that stay the same for the entire life of the loan.
    • You will have predictable monthly payments throughout the life of the loan.
    • You'll be protected from rising rates, so your principal and interest payments do not change, no matter how high interest rates rise.
  • Adjustable-rate mortgages have interest rates that adjust periodically based on market conditions.
    • The initial rate is fixed for an introductory period (usually three to ten years), and is typically lower than for a fixed-rate mortgage. After that, the rate adjusts annually or semi-annually depending on the product and based on a market index, but it can't go above a predetermined adjustment cap.
    • Because of the lower initial rate, some borrowers may be eligible for a larger loan amount with an ARM than with a fixed-rate mortgage.

  Loan Terms
  The term of a loan is the period of time you will spend repaying it. The most common loan term is 30 years, but 40-, 20-, 15- and 10-year mortgages are also available.

  Whether you’re better off with a longer-term loan or a shorter-term loan depends on a number of factors, most notably your monthly income and your long-term financial goals. Comparing two fixed-rate loans with different terms:

  • The longer-term loan will offer lower monthly payments. This may be a good option if you’re on a tight budget or would prefer to direct your monthly cash flow toward other investments or expenses.
  • The shorter-term loan will mean higher monthly payments, but you’ll be repaying the loan faster and potentially reducing loan interest.

  Other Considerations
  Besides the nature of the interest rate and the loan term, other important features of a mortgage loan include:

  • Whether the loan amount is above or below what is known as the “conforming loan limit” set by Fannie Mae and Freddie Mac*. Mortgages larger than this amount are termed “jumbo loans” and require higher rates than similar conforming loans.
  • Whether the loan can be insured or guaranteed by a government agency, such as the FHA or VA.
    • FHA loans are backed by the Federal Housing Administration, and are designed to assist low-to-moderate income homebuyers by providing low down payment requirements and flexible qualifying guidelines.
    • VA loans are backed by the Department of Veterans Affairs (formerly the Veterans Administration), and are available to qualified veterans and active-duty military personnel and their spouses. They provide many of the same features as FHA loans.
  • Whether the loan has flexible qualifying guidelines, which may be able to accommodate borrowers with credit challenges, excessive debt, or previous bankruptcy, foreclosure or tax delinquency. If you’ve experienced financial challenges, Wells Fargo may be able to help you build a secure future through our credit solutions for homeownership.

  Wells Fargo Home Mortgage offers a wide variety of product options to meet your unique homebuying needs. Our home mortgage consultants can help you find the right combination of loan features to support your financial goals. Contact us to get started today!

  
  

  A preapproval is your lender's written agreement to finance your home purchase up to a specific amount, subject to certain conditions. Getting preapproved can be a good move for serious homebuyers because it shows sellers that you come to the negotiating table ready to complete the transaction.

  Preapproval vs. Prequalification
  
  A preapproval indicates that a lender has taken a detailed look into your financial background and has issued a conditional loan approval, pending specific property details. Because preapproval includes a credit check, it's more powerful than a prequalification letter, which generally only estimates what you can borrow based on information you've provided.

  What are the advantages of being preapproved?

  Preapproval offers a number of advantages over waiting to apply for a mortgage until after you've found a home. It lets you:

  • Shop for a home with the confidence of knowing how much you can borrow.
  • Take advantage of the preference many home sellers have for preapproved buyers.
  • Find out about possible qualification problems early in the homebuying process.

  Who can benefit from preapproval?
  
  Preapproval can be a great advantage for anyone buying a home, but it can be especially useful for buyers looking for their first home and those who are self-employed or work on commission.

  • First-time homebuyers. Without a record of previous mortgage payments, sellers may see first-time homebuyers as less likely to obtain financing than a similar buyer who's already demonstrated the ability to meet a monthly mortgage payment. A preapproval helps even the field by showing the seller that a lender has already run the numbers and is willing to proceed with the transaction.
  • Self-employed buyers or commissioned employees. Because their incomes may fluctuate more dramatically, self-employed and commissioned buyers often lack the financial documentation of salaried employees, which can send up a red flag to some sellers. Showing that a lender has already considered these factors will help mitigate this risk.

  How does the process work?
  
  Before you begin shopping for a home, submit your financial information to Wells Fargo Home Mortgage. We'll review your data and then, if you meet qualification requirements, we'll provide you with a written preapproval for up to a specified mortgage amount, subject to certain conditions. It is important to note that a preapproval is not a commitment to lend. A loan commitment is contingent upon verification of application information, satisfying all underwriting requirements and conditions, and providing an acceptable property, appraisal, and title report.

  
  

  Finding the Home

  One of the most important parts of the homebuying process is finding the right home for you and your family. After all, you will probably be living there for years to come, so it should be a place where you will be happy. Here are some basic points to consider during the search:

  • Location. Location of the home is the most important factor to consider while buyging a home. The factor that may be considered are school district if you have kids, or close to a job, or should have easy access to basic facilities like bus line, super market, banks, fast food etc and ofcourse the surrounding neighborhood.
  • Size and special features. Before you start your search, you should come up with a list of what you need and what you want  in your home. The house should have everything as per your need plus as much as you can get that is in your want list. How many bedrooms and baths do you need? How many car garage space and how big should be back yard. Do you need central heating or air conditioning? Make sure you distinguish your wants from your needs. Rank each item according to its importance, and look for a home with the most important features first.
  • Types of homes. A single-family home is not the only housing style you have to choose from. Condominiums, town homes, and co-ops all offer different lifestyle and ownership options.

  Even if you have to do without some of the items on your wish list, your home should be a place where you can be comfortable — you should not have to settle for a place that isn't right for you. Educate yourself, think about your options, and take the time you need to make the right choice.

  Once you've found a home you want to buy, you'll need to negotiate a price with the seller and agree to a purchase contract.
  
  Making an Offer
  
  Unlike many major purchases which have a specific price tag, homes sell for whatever amount the buyer and seller negotiate. Your real estate agent or legal counsel should help you determine the appropriate amount for your initial offer. When you make the offer, keep these things in mind:

  • Put it in writing. All negotiations should be handled in writing—not verbally—to ensure that there is a clear understanding between the parties. If you must negotiate verbally, at least follow up in writing.
  • Have your preapproval from your lender to give you maximum leverage. Sellers usually prefer offers from buyers whose financing is already secured.
  • Be prepared to submit an earnest money deposit (also called a "good faith" deposit) to show your commitment to the transaction. This deposit, the amount of which varies by locality, will go into an escrow account until the transaction is complete. 

  The Contract
  
  The purchase contract, or purchase agreement, is a signed agreement between the buyer and seller describing all the terms of the transaction. Like other contracts, this document represents a legally binding agreement, so approach it with care. Depending on what state you live in, an attorney, real estate agent, or title company may help negotiate and draft the contract. Purchase agreements typically include these items:

  • The home address and legal description of the property.
  • The sales price and the amount of the loan, down payment, and deposit.
  • The names of both parties and their respective agents, brokers, or attorneys.
  • Any applicable time limits. These may apply to the buyer's acquisition of financing, the seller's response to the offer, the closing, or the transition of occupancy.
  • Any conditions or contingencies that must be met in order to complete the transaction. For example, the contract may be contingent on the buyer's ability to obtain financing, the home being appraised at a certain value, the results of a home inspection, or the sale of the buyer's current home.

  Remember that no two real estate transactions are exactly alike. Buyers and sellers bring different backgrounds, interests, and agendas to the negotiating table, and the purchase contract will reflect those differences.

   

  Closing

  The closing is the final phase of your homebuying and mortgage process, so now your new home is just a few steps away. If you haven't already, make sure you do the following:

  • Review your loan commitment with your lender to make sure you understand all the requirements.
  • Set the closing time and date based on your sales contract and the loan commitment expiration.
  • Confirm that a survey of your property has been ordered. Check with your closing agent or attorney.
  • Make preparations to move (notify your landlord, complete change of address forms, arrange for utilities to be disconnected at your current address and made available at your new home, and plan your actual move).
  • Conduct a final walk-through inspection of your home-to-be.
  • Make sure you've satisfied all the requirements of your agreement with the seller.
  • Get a certified or cashiers check from the bank for your closing costs. Cash or personal checks are generally not accepted.

  On closing day, ownership of the property will be transferred from the seller to you, and you will sign documents that acknowledge your rights to the property you have purchased, your agreement to repay the money you have borrowed, and the lender's right to the property if you default on the loan. A closing agent (an attorney of your choice or a title agency representative, depending on local custom) will coordinate and distribute all the paperwork and funds, according to the terms agreed upon by you and the seller.