1. What is the difference between a mortgage broker and a mortgage bank?
A Mortgage Broker brokers loans out to other Lenders. A Mortgage Banker underwrites, funds and closes the loan in their own name. Because Commerce Home Mortgage operates as both a Mortgage Banker and a Mortgage Broker, we have access to every conceivable loan program available. There are dozens of loan programs available to choose from – a significant advantage to the Borrower!

2. Can you find better rates than what the “Big Banks” offer?
YES, and we consistently do! Since Commerce Home Mortgage can shop for loan programs from all of the banks – big and small – we have a much larger pool of resources to draw from. We generally use a handful of banks that are very competitive – and more importantly, provide a quality and consistency of service we can count on. It is EQUALLY important for us to be able to close the loan within the contract period and provide the most competitive loan program. We know missing the mark on either of these two key issues could cost us a client!

3. What is a “fixed” rate mortgage?
A fixed rate mortgage is a mortgage that has a fixed interest rate and does not fluctuate with market rates, like an adjustable rate mortgage (ARM). Typically fixed rate mortgages refer to a “30 year fixed” loan, where the interest rate and the payment will be fixed for 30 years. ARMs are fixed for only a temporary length of time before the loan begins to adjust. For example, a 3-Year Fixed mortgage has a rate that is fixed for the first 3 years and variable thereafter.

4. What is the difference between a “jumbo” and a “conforming” loan?
Federal loan agencies have established maximum loan limits for loans they will participate in. Loans that fall below these limits are referred to as “conforming”, while loans exceeding those levels are referred to as “jumbo.” Loans that federal loan agencies will participate in are considered “safer” for private investors, and as a result, conforming mortgages generally are better priced than jumbo mortgages.

5. What is an FHA loan?
An FHA (Federal Housing Administration) loan is a government backed mortgage insured by HUD (Housing and Urban Development) that has historically been for borrowers seeking minimal down payment, or who fall below standard lending guidelines. Recently FHA loans have become more widely available, providing substantial liquidity to the secondary mortgage market. In 2006, FHA market share was around 3% of total originations, today, that number has climbed to 35%, and is continuing to grow. FHA loan guidelines have recently changed to reflect higher home values in areas of the country where FHA loan limits were previously too low to help the average household. Today FHA loans have emerged as the main source of financing for low down payments and / or lower credit score purchases and refinances, and provides excellent financing for most homeowners.

6. What is an “Adjustable Rate Mortgage” (ARM)?
Adjustable rate mortgages, also known as “variable rate mortgages,” have fluctuating interest rates in accordance with market changes. Simply, your monthly payments may go up or down depending on the performance of an underlying index which is pegged to market interest rates. Most ARMs float at a fixed spread (margin) above the underlying index, which is typically based on U.S. Treasury Bills of different maturities or Libor. Usually an adjustable rate mortgage will start at a lower interest rate (teaser rate) than a fixed rate mortgage, allowing the borrower to qualify for a larger mortgage. However, the downsides of ARMs are their fluctuating rate and / or payments.

7. What does the 3/1 or 5/1 designation mean with an ARM?
ARM’s have limits on how much and how often the interest rate can adjust, and these limits will vary from loan to loan. A 3/1 ARM (also known as a 3-Year Fixed’) will have an initial fixed interest rate for 3 years, and then will adjust once per year thereafter, a 5/1 ARM (also known as a 5-Year Fixed’) will have an initial fixed interest rate for 5 years and then will adjust once per year thereafter.

8. What is an “interest only” mortgage?
Interest only mortgages payments are limited to the interest accrued each month. This is different from a “fully amortized” loan payment, which includes the interest for the month plus an additional amount that is applied towards paying down the balance. The additional amount slowly reduces the principal until at the end of the loan term it is paid in full. With interest only mortgages, when only the required payment is made no progress is made towards paying down the principal. At the end of an “interest only” loan term, you will still owe the original amount you borrowed. Lower monthly payments on an interest only loan typically allow you to qualify for a larger mortgage than you could afford with a fully amortized loan. Another benefit to “interest only” is flexibility – the borrower can choose to make the low minimum payment or include an additional amount to apply towards the principal.

9. What is equity?
Equity is the difference between what your home is worth, and the amount of debt owed on the property (your mortgage). This difference proportionally represents the homeowner’s financial interest in his or her property. A homeowner can borrow against the equity in his/her home with a home loan and use the funds for whatever they please, from debt consolidation to major purchases to home improvements. Because the loan is mortgage-based, interest on the home loan may also be tax deductible, for more details contact your tax advisor.

10. What is APR?
The APR (annual percentage rate) is an interest rate different from the note rate. APR was created to establish a standard rate system within the industry, measuring the ‘true cost of a loan’, and is used to compare loan programs between different lenders. It prevents lenders from advertising a low rate while hiding fees. Mortgage companies are required to disclose APR by the Federal Truth in Lending law when they advertise rates.

11. What is “private mortgage insurance”?
PMI (Primary Mortgage Insurance) protects the lender from a borrower defaulting on a loan with a loan to value exceeding 80%. It was designed to protect lenders financially if a borrower defaults. The policy adds additional costs to the monthly mortgage payment. PMI is not a permanent cost, and may be removed when you have at least 20% equity in the subject property, which can come in the form of loan pay downs, appreciation, property improvements or any combination of the three. This is typically proven through a new appraisal of the property.

12. How are Mortgage Brokers compensated?
We get special wholesale pricing from Lenders. With this “below retail pricing,” we can offer our clients a very competitive rate and still receive a rebate from the Lender, which is compensation for our services.

13. What are Points?
Points, also referred to as “origination” or “discount” points are loan origination fees charged by your lender. One ‘point’ refers to 1 percent of the loan amount. For example, if you are borrowing $250,000, 1 point would cost $2,500. These fees are optional. Points were designed as an incentive system to encourage you the borrower to get a lower interest rate in exchange for paying fees up front (called a rate buy down). If you don’t have available cash, you can get a loan that has a fraction of a point or no points at all; but be warned, loans with low points generally have higher interest rates for the borrower in the long run. If you have cash available and plan on keeping your loan for many years, then it may make sense to “buy down” the rate with discount points.

14. What is a pre-payment penalty?
A pre-payment penalty is a fee charged by a lender when a loan is paid off before a pre-determined date. Both the amount of the penalty and the length of time it is in effect vary from loan to loan. The penalty is typically 6 months interest and is applied for the first 2 or 3 years of the loan. Pre-payment penalties are an option. Lenders build them into their loans in exchange for a lower interest rate. If after receiving this lower interest rate the borrower pays off the loan after just a few months, the lender is able to recoup some of their cost by assessing this penalty.

15. Why should I buy and not continue to rent, renting is less expensive, right?
In the long run, buying as opposed to renting is always more financially sound then renting. When renting you are helping pay your landlord’s mortgage, and you lose out on the tax breaks for owning a property. Advantages of renting includes no property tax liability and no property maintenance costs. If you are looking to purchase a property, there are many financial advantages. First and foremost, instead of building equity in your landlord’s property, you’re building it in your property, and also reap the benefits of property appreciation. In addition, the interest payments on your mortgage are tax deductable, along with the property taxes you pay. Disadvantages to property ownership include property taxes (although they are tax deductable), insurance (homeowners, fire, flood, earthquake, etc.), and maintenance of the property.

16. Should I pay points? Do zero point loans with no fee’s really exist?
Whether or not you should pay points depends on how long you plan on keeping the property / loan. In any case, you or your loan officer should perform a break-even analysis.

17. Can my loan be sold? What happens if my lender goes out of business?
Yes, your loan can and most likely will be sold. The sale of mortgage backed securities to the secondary market is a principle component of how the mortgage industry works. If your lender goes out of business, you will continue to make your mortgage payments.

18. As a borrower, do I need to be a US citizen?
US citizenship is not required to acquire a mortgage, however, non – US Citizens need to maintain legal resident alien status.

19. I’m 25 years old; can I get a mortgage with Commerce Home Mortgage?
Yes, at age 18 you are legally eligible for home ownership and capable of obtaining a mortgage.

20. Is 20% down required to get a loan for my new home?
No, with FHA loans, your down payment can be as low as 3% – 6% of the purchase price.

21. Will one late payment on my credit card or rent disqualify me from getting a mortgage?
No, although it may affect your rate, please contact one of our Loan Officers.

22. How do I know what loan is best for me and my family?
This is a complex question, and depends on a number of factors. Contacting one of our Loan Officers is the best avenue to understanding your options.

23. When Purchasing a home, who can I rely on for what?

Count on your Real Estate Agent to:

Preview and present available homes and weed out those that are overpriced or do not meet your expectations.
Help you determine the difference between a “great investment” and “good buy” (for example, a home that might not appreciate in value as competitively, or might not hold as high of a resale value).
Negotiate the best deal for you and with your Pre-Approval Letter, your Agent is sure to have the best tools available to catch the Seller’s attention.

Count on your Loan Officer to:

  • Consult with you on the best possible loan program to meet your needs now and in the future.
  • Offer you an array of possible loan programs with the most competitive rates available.
  • Keep you informed of your loan status throughout the entire process.
  • Communicate with your Real Estate Agent.

Your Role:

  • Communicate with your Real Estate Agent about your expectations, questions and concerns.
  • Meet with your Mortgage Consultant to discuss your long and short term financial and investment goals and obtain a Pre-Approval Letter as early in the process as possible.
  • During the early stages of the loan process, provide all the documentation that is requested for the loan as expediently as possible.
  • Be available for decision-making processes, and ensure that your schedule is flexible for final document signing three to five days before the closing date.

24. How does Pre-Qualification and Pre-Approval work?
Purchase Loans: Credit will be run and an application will be taken. This can be over the phone, in person, but easiest is through our website. The loan application will be analyzed to determine the loan amount you are qualified to borrow and we will review with you your loan program options. For most loan requests, Commerce Home Mortgage will approve your loan subject to verification of your income and source of down payment funds. Unique or larger loan requests may require this information be verified before issuing a Pre-Approval or a Pre-Qualification letter.

After completing the process, a letter will be generated for your Realtor ® of choice, or we can refer you to a Realtor ®. We will go over the relevant issues of your file as they relate to writing a successful purchase contract, such as:

  • Closing costs required from the borrower
  • Closing costs credits required from the seller
  • Maximum purchase price
  • Downpayment funds
  • Interest rates

25. How does the Appraisal Process work?
On a purchase transaction, the appraisal will be ordered following the acceptance of the offer. It is typically the job of the listing agent to provide comparable sale information to the appraiser. When applicable, the seller will be asked for a list of the upgrades in your new home and the approximate value of those upgrades. The loan applicant will be required to pay for the appraisal in advance. The appraisal fee is collected by an Appraisal Management Company (AMC).

An appraisal is an estimated value of a property. It is used by the lender to ensure the purchase price of the property is reasonable. We hire an independent appraiser to prepare the appraisal. The appraisal fee may be paid upfront at the time of the loan application. The charge for a full appraisal varies, but is typically $400 – $500 for a typical home. The appraisal is submitted and requires a satisfactory review by the lender for final loan approval.

On a refinance transaction, the appraiser will call the homeowner to schedule an appointment. Your loan consultant will advise you of the fee before they call to set up the appointment. The fee is collected in advance by an Appraisal Management Company (AMC).

26. What are the top Ten Things I Should NOT Do before Closing Escrow?

  1. Purchase a car or shop for a car
  2. Increase credit balances or apply for new credit (no credit checks should occur during the loan process!)
  3. Open a new bank account or make large deposits
  4. Transfer funds from one account to another
  5. Shift credit card debt from one Creditor to another
  6. Sell major assets
  7. Get married, divorced or go on maternity leave
  8. Go on vacation… making you unavailable to the Lender
  9. Borrow money from any source
  10. Change employers or quit your job

The items listed above are the most typical occurrences that affect a Lender’s ability to close the loan transaction successfully, and on time. From the time that a loan transaction begins, to the time escrow closes, a Borrower’s credit scores, account balances, debts, assets, employment and income are reviewed at varying intervals. If any of the above events or items are going to occur during your loan transaction, contact your mortgage consultant before taking action, so that every measure possible can be taken to ensure the loan transaction closes successfully and on time.

27. How does Credit Reporting work?

A credit report may be run for a fee. Our mortgage consultant will go over the report with you to make sure the balances are accurate.

These are the credit bureaus:

  1. Experian (XPN)/Fair Issac Score, PO Box 9601, Allen, TX 75013-2104
    Toll Free (888) 397-3742 www.experian.com
  2. Equifax (EQ)/Beacon Score, PO Box 105873, Atlanta, GA 30348
    Toll Free (888) 841-7335 www.equifax.com
  3. TransUnion (TUC)/Empirica Score, PO Box 4000, Chester, PA 19016
    Toll Free (888) 887-2673 www.transunion.com

Each bureau has different items reported to them and these items provide a credit score that will vary between each bureau. Based on these scores, the lender will determine loan eligibility and pricing. Major criteria for determining your score are:

  • Number of accounts
  • Length of time since account was opened
  • Number of late payments
  • Amount owed vs. high balances

28. What is a FICO Score?
The actual definition of FICO scoring is a formula for credit risk assessment that is believed to be highly predictive of future payment risk.

FICO Scores are calculated from a lot of different credit data in your credit report.

No one piece of information or factor alone will determine your score. The importance of any factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. Thus, it’s impossible to say exactly how important any single factor is in determining your score. Your FICO score only looks at information in your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.

29. How does the Escrow and Title Company play into my Mortgage Approval Process?
It is the job of the escrow officer to complete lawful tasks in regards to your home loan. The escrow company will ensure that the interests of all parties are met. They will collect legal papers and loan documents for signature, collect and disperse funds, and work with your insurance agent to obtain a home owners insurance policy satisfactory to the lender. You will receive Escrow Instructions and a Statement of Identity, amongst other documents from the escrow officer.

The Statement of Identity is a form requesting detailed information about your personal history and is required to ensure that the title to the property is accurately recorded upon close of escrow.

You will be provided a Preliminary Title Report. This is a document prepared by the title division and lists the items of record on your new home. The title division searches public records for any liens against you or your home (previous loans of the sellers to be paid off, tax liens, judgements). It searches the property tax rolls and ensures that the property taxes are paid current.

You will be asked the manner is which you choose to hold title. All records are meticulously maintained in order for the clear title of your home to be transferred to you.

You will typically go to the escrow/title company office to sign loan documents and prior to closing escrow, you will be notified of the amount of funds required to be brought to escrow. These funds typically must be in the form of a cashier’s check.

30. Why do I need Title Insurance?
For most people, real estate is the most expensive and important investment they will make in their lives. Because it is such an important factor in our society, it is granted unique treatment under the law. When you purchase a home or other real estate, what you actually acquire is title to the property rather than the land itself. Your title encompasses ownership, use, and possession of the land. However, title to property may be limited by rights and claims asserted by others. Problems with title can limit your use and enjoyment of real estate, and have negative financial consequences. Title defects also threaten the security interest your mortgage lender holds in the property. Protection against hazards of title is available through a unique coverage known as title insurance. Unlike other kinds of insurance that focus on possible future events and charge an annual premium, title insurance is purchased for a one-time payment and is a safeguard against loss arising from hazards and defects already existing in the title, with extended coverage available to cover certain future events, as well.

Owner’s vs. Lender’s Insurance: There are two basic kinds of title insurance: Owner’s coverage and Lender’s (or mortgagee) protection. Owner’s title insurance is ordinarily issued based on the amount of the real estate purchase price and may last forever, even after the insured has sold the property, depending on the type of owner’s policy. By contrast, the amount of lender’s title insurance is based on the loan amount. Most lenders require mortgagee title insurance as security for their investment in real estate, just as they require fire insurance and other types of coverage as investor protection.

Title insuring begins with a search of title records for matters affecting the title to the real estate concerned. The examination of evidence from a search is intended to fully report all material objections to the title. Frequently, instruments that don’t clearly pass title are found in the title “chain” (or history) of ownership assembled from the records in a search. These need to be corrected before a clear title can be conveyed. Some examples of instruments that can present concerns are:

  • Outstanding mortgages
  • Judgments and tax liens
  • Deeds, mortgages, wills, and trusts that contain improper vestings, and incorrect names
  • Incorrect notary acknowledgments
  • Easements

Through the search and examination, title problems like these are disclosed so they can be cleared up whenever possible. But even the most careful investigation cannot locate all hidden defects of title.

In spite of all the expertise and dedication that go into a search and examination, hidden defects can emerge after completion of a real estate purchase, causing an unpleasant and costly surprise. Some examples are:

  • Previously undisclosed heirs with claims against the property
  • A forged deed that transfers title to the real estate
  • Instruments executed under an expired or fabricated power of attorney
  • Mistakes in public records

Thanks to title insurance, homebuyers can enjoy protection against many title claims and potential losses. When title insurance is provided, lenders are willing to make mortgage funds available in geographic areas where they know little about local market conditions. Title insurance policies offer unique safeguards that are essential for secure investments by both real estate purchasers and lenders. Make sure you are fully protected.

31. What should I know about Property Taxes?
In California, property taxes are due twice a year: the 1st Installment is due April 10th and the 2nd Installment is due December 10th. Property taxes are usually calculated at 1.25% of the purchase price (this may vary according to city/county). Your Escrow Officer will give you the accurate percentage.

Impounds: If your financing has a Loan to Value (LTV) ratio of 80% or higher and is one loan, you have to include your taxes in your monthly payment. If you do a 1st and 2nd mortgage combination, or have a LTV less than 80%, impounds are optional. Many lenders charge extra to not have impounds. To open an impound account, you will be asked to bring in four to seven months of taxes to escrow as part of closing costs. The Lender will open an impound account and most lenders show the account balance on your monthly statement. Starting with your first payment, 1/12th of your tax bill will be included in your monthly payment. The Lender will pay your tax bill when due. You should also get a copy of the bill from the County. Always check your statements to make sure that the money was deducted from your account. If it wasn’t, contact your Lender.

Supplemental Tax Bills: For the first six months (sometimes longer) your tax bill will be based on the prior owner’s assessed value. The new bill will be based on the current purchase price. There will need to be an adjustment for the difference in the two assessments, which is called a tax supplement. When the County updates their records, you will receive one bill with the new assessment. The Lender may not pay supplemental bills.

32. Can you give me more information of Homeowners Insurance?
Condominium or Planned Unit Development (PUD): Your Homeowner’s Association dues cover the exterior structure, however, please note that the contents of your home are not insured. You will have to call your insurance agent if you want to insure the contents, and lenders may require minimal “wall” insurance.

House: For purchase transactions, the first year premium is required to be paid at closing. You will select your own insurance agent and give him/her the name and phone number of your escrow officer. Your agent will send the bill to the Escrow Company and this will be added to the amount of money you will need to bring in at the Close of Escrow.

Similar to the collection of your property taxes, you have two options for paying your homeowner’s insurance:

Impounds: Your Lender can open an Impound Insurance Account for you, with an initial deposit of one year, plus two months premium payments up front. Thereafter, 1/12th of your annual insurance premium will be included in your monthly mortgage payment amount. The Lender will automatically make the annual payment of your homeowner’s insurance policy premium.

Please advise your Loan Officer early in the process if you’d like impounds so that the loan documents can be prepared accordingly. Making this selection later in the loan process may result in a “Document Re- Draw Fee” which will be collected from the Borrower at the Close of Escrow.

No Impounds: You will receive installment loan statements from your insurance company, which you will be responsible for paying directly.

33. I heard that a mortgage can provide me with tax benefits, how?
In order to encourage home ownership, the government allows individuals to deduct home ownership related expenses from your taxable income. The expenses are mortgage interest, real estate taxes, and loan origination fees (also known as points). Income tax rates are graduated. Meaning the rates are higher as your income levels enter higher tax brackets. In order to calculate your tax benefit, multiply the marginal tax rate or the highest tax rate you paid on your federal and state income tax returns. A tax savings scenario would include the following example : On a 30-year, $350,000 loan at 5.5%, the interest in the first year of the mortgage would be $19,132. That $19,132 can be deducted as an itemized deduction before figuring how much tax you owe. The result: You owe less in taxes. Depending on the loan amount, a first time buyer can usually increase his or her withholding exemptions via the W-4 Form by at least four and still get a refund. This should be taken into account when considering the mortgage you can afford and your tax planning.

Note: Check with your tax advisor for specific details.

34. What do the Closing Costs entail?
Purchase or refinance transactions require services from several entities, and each one has a fee connected to the services provided. There are two types of fees included in your closing costs:

Recurring/Pre-Paid Costs are not considered “fees.” These are the pro-rated dollar amounts of the recurring costs you will be paying during the life of your homeownership, and include: interest, taxes, insurance, homeowners’ dues and mortgage insurance (when applicable).

Interest will be paid from the day before Close of Escrow (also referred to as “funding”) until the end of the month, on a per diem basis. Insurance is collected one year in advance for purchases. For refinances, the Lender will verify that your home owner’s insurance policy is current. Property Taxes will be pro-rated for the current period, and impounds (if selected) will be collected. Homeowner’s Association Fees are pro-rated and collected for purchase transactions. Mortgage Insurance, when applicable, is collected.

Non-Recurring Costs are one-time fees. Escrow fees are collected by the Escrow Company for handling the transaction and to cover such expenses such as notary, messenger and overnight delivery fees. Title fees are collected to cover the cost of Title Insurance and Government Fees such as recording. Lender/Broker fees are collected to cover the cost of loan origination, the credit report, appraisal, loan processing and underwriting. Miscellaneous fees that may also be collected include the costs for property inspections, home warranties and real estate processing.