Mortgage Basics

What’s in a Credit Report
Your credit report includes your identifying information, credit accounts, payment history, recent inquiries, and public records like bankruptcies or tax liens.

Because your credit report is an important part of many credit scoring systems, it is very important to make sure it’s accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:

Equifax: (800) 685-1111
Experian (formerly TRW): (888) EXPERIAN (397-3742)
Trans Union: (800) 916-8800
These agencies may charge you up to $9.00 for your credit report.

You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. This free credit report may not contain your credit score and can be requested through the following website: https://www.annualcreditreport.com

Improving Your Score
The best ways to raise your score are simple: pay bills on time, lower your balances, avoid taking on new debt, and keep older accounts open to build history. Small consistent habits make the biggest difference over time.

If You’re Denied Credit
You have the right to know why. Lenders must provide specific reasons for denial and tell you which credit bureau supplied the information. If your report contains errors, you can dispute them directly with the credit bureau to have them corrected.

Fair Credit Reporting ActThe Fair Credit Reporting Act (FCRA) is designed to help ensure that CRAs furnish correct and complete information to businesses to use when evaluating your application.

Your rights under the Fair Credit Reporting Act:

• You have the right to receive a copy of your credit report. The copy of your report must contain all of the information in your file at the time of your request.
• You have the right to know the name of anyone who received your credit report in the last year for most purposes or in the last two years for employment purposes.
• Any company that denies your application must supply the name and address of the CRA they contacted, provided the denial was based on information given by the CRA.
• You have the right to a free copy of your credit report when your application is denied because of information supplied by the CRA. Your request must be made within 60 days of receiving your denial notice.
• If you contest the completeness or accuracy of information in your report, you should file a dispute with the CRA and with the company that furnished the information to the CRA. Both the CRA and the furnisher of information are legally obligated to reinvestigate your dispute.
• You have a right to add a summary explanation to your credit report if your dispute is not resolved to your satisfaction.

What Happens at Closing
Closing is when you sign your final loan documents, pay your remaining funds, and receive the keys to your new home. Most closings are handled by a title or escrow company, and you’ll get a final review of all loan terms and settlement figures before signing.

Types of Closing Costs

• Statutory Fees: Including but not limited to: taxes, deed recording fees, and prorated property taxes required by local and state agencies.
• Third-Party Fees: Payments to professionals like attorneys, appraisers, inspectors, and title or escrow companies.
• Upfront Expenses: Including but not limited to: your deposit, homeowners insurance, and prepaid interest or property taxes.

Understanding Your Loan Estimate
Under the Real Estate Settlement Procedures Act (RESPA), your lender must give you a Loan Estimate within three business days of applying. This form outlines your projected closing costs and total cash needed to close.

Beyond mortgage approval, appraisals can be used to contest property taxes, settle estates or divorces, determine insurance value, or guide real estate negotiations.

How Value Is Determined
Appraisers rely on three main methods:

• Cost Approach: Land value plus construction cost minus depreciation.
• Sales Comparison: Recent sales of similar nearby homes (“comps”).
• Income Approach: Value based on potential rental income (for investment properties).

Ownership and Transfers
Even though borrowers pay for the appraisal, it belongs to the lender. In many cases, the report can be transferred to another lender if you change loan programs, sometimes with a small retype fee.

Market Value vs. Sale Price
Sellers and agents typically set the listing price using a Comparative Market Analysis (CMA), which is based on recent neighborhood sales, not a formal appraisal.

Helping the Appraiser
You can assist by providing key details such as the purpose of the appraisal, property documents (deed, survey, purchase agreement), tax information, and any recent upgrades or included personal property.

How It Works
PMI covers a portion (usually the top 20%) of the loan balance if the borrower stops making payments. While it adds a monthly cost, PMI allows many buyers to qualify for a home sooner, and sometimes for a higher loan amount, without needing a full 20% down.

Cost and Payment Options
PMI rates depend on your loan type, credit score, and down payment. It can be paid monthly, upfront at closing, or financed into the loan. Your lender will present available options so you can choose what best fits your budget.

When It Can Be Removed
Under federal law (Homeowners Protection Act of 1998), PMI must be automatically removed once you reach 22% equity, and you can request removal at 20% equity if your payments are current. Keep in mind that lender-paid PMI and certain “high-risk” loans may have different rules.

Key Takeaway
PMI isn’t permanent, it’s a stepping stone that helps buyers get into a home sooner. With consistent payments and home appreciation, you can remove it and reduce your monthly housing cost over time.

When should I refinance?
It’s generally a good time to refinance when mortgage rates are 2% lower than the current rate on your loan. It may be a viable option even if the interest rate difference is only 1% or less. Any reduction can trim your monthly mortgage payments. Example: Your payment, excluding taxes and insurance, would be about $770 on a $100,000 loan at 8.5%; if the rate were lowered to 7.5%, your payment would then be $700, now you’re saving $70 per month. Your savings depends on your income, budget, loan amount, and interest rate changes. Your trusted lender can help you calculate your options.

Should I refinance if I plan on moving soon?Most lenders charge fees to refinance a loan. So, if you plan to only stay in the property for a couple of years, your monthly savings may not accumulate to recoup these costs. Example: A lender charged $1,000 to refinance your loan that resulted in saving you $50 each month; it would take 20-months to recoup your initial costs. Some lenders will charge a slightly higher than average interest rate on refinance loans, but will waive all costs associated with the loan. This will depend on the interest rate on your current loan.

Understanding Points and Rate Locks
You can pay points (1 point = 1% of your loan) to reduce your interest rate long-term. This is ideal if you plan to stay in your home for several years. You can also lock your rate to protect yourself from market fluctuations during the loan process, typically for 30–60 days.

Credit and Lender Choice
Even with past credit issues, refinancing may still be possible. Your rate will depend on your credit profile and equity position. When comparing lenders, look beyond rates and choose one who provides clear communication, strong service, and honest guidance throughout the process.

Amortization – The process of paying off your loan balance over time through regular monthly payments that include both principal and interest.

Annual Percentage Rate (APR) – The total cost of borrowing money, including interest and fees, expressed as a yearly rate.

Appraisal – A professional estimate of a property’s fair market value, required by lenders before final loan approval.

Assumption – When a buyer takes over the seller’s existing mortgage with lender approval.

Closing – The final step in a real estate transaction where documents are signed, funds are disbursed, and ownership transfers to the buyer.

Closing Costs – Fees and expenses (such as title, appraisal, and lender fees) paid at closing, usually totaling 2–5% of the loan amount.

Clear-to-Close – The lender’s final approval confirming that all loan conditions have been met and the file is ready for closing.

Comparables (Comps) – Recently sold properties with similar features used by appraisers to determine a home’s value.

Conventional Loan – A mortgage not insured or guaranteed by the government (like FHA or VA), often requiring higher credit and down payment standards.

Credit Report – A detailed record of your borrowing and payment history used by lenders to evaluate creditworthiness.

Credit Score – A three-digit number (typically 300–850) representing your credit risk level based on your financial history.

Debt-to-Income Ratio (DTI) – The percentage of your monthly income that goes toward debts, including your mortgage payment.

Deed – The legal document transferring property ownership from the seller to the buyer.

Down Payment – The portion of the home’s purchase price paid upfront, typically ranging from 3% to 20%.

Earnest Money – A good-faith deposit made when you submit an offer to show the seller you’re serious.

Equity – The difference between your home’s market value and the amount you owe on your mortgage.

Escrow – A neutral third party that holds and disburses funds (like taxes and insurance) or manages the closing process.

FHA Loan – A government-insured loan designed to help buyers with smaller down payments and lower credit scores.

Fixed-Rate Mortgage – A loan with an interest rate that stays the same for the entire term.

Foreclosure – The legal process a lender uses to take ownership of a property when the borrower fails to make payments.

Homeowners Insurance – Insurance that protects against financial loss from damage to your home or property.

Loan Estimate (LE) – A federally required document that outlines your estimated loan terms, rates, and closing costs.

Loan-to-Value Ratio (LTV) – The percentage of the home’s value being financed by the loan; lower LTV often means better loan terms.

Mortgage Insurance (PMI/MIP) – Protection for the lender if you default, typically required when putting less than 20% down.

Pre-Approval – A formal lender review confirming how much you can borrow based on verified income, assets, and credit.

Principal – The amount of money borrowed or still owed on your loan, not including interest.

Rate Lock – A lender’s guarantee that your interest rate won’t change for a set period during the loan process.

Title Insurance – A policy protecting against ownership disputes or issues with the property’s title history.

Underwriting – The lender’s detailed evaluation of your financial profile and property to decide whether to approve the loan.