Frequently Asked Questions

Here are the answers to some of the most common questions from people who are about to buy a home:

• What is a point? - A point is equal to one percent of your loan amount. So if you are borrowing $100,000 a point would be $1000.
• Why do I have to pay points? - First of all let's get something out in the open. Sometimes a point is required depending on the loan program but some lenders use points for the sole purpose of making more money. They call it a loan origination fee and act as if it is a normal charge. Points do have a very practical and useful purpose when used properly. Paying points may allow you to get a reduced interest rate and, in turn, save you money on your interest charges. Depending on how long you will be in your house, it could make good sense to pay a point or two to get that reduced rate. One thing to keep in mind is that paying points means your closing costs will increase. So, if you are trying to get to the settlement table with as little cash as possible paying points may not be an option. If you would like to know if you should pay points use my should I pay points calculator.
• What is PMI (Private Mortgage Insurance)? - PMI or Private Mortgage Insurance is insurance that is taken out on your loan in the event you default and your house goes into foreclosure. If this unfortunate event should transpire the institution that lent you the money will be reimbursed for most of it's losses. PMI is required on Conventional loans when the buyer is making a down payment less than twenty percent of the sales price (The LTV is higher than 80). On FHA loans PMI is always required regardless of the size of the down payment however, it is less expensive on FHA loans than Conventional loans. For more information on the difference between FHA and Conventional loans visit the loan programs page.
• What is LTV (Loan to Value)? - Your loan to value ratio should be simply thought of as the percentage of the sales price that you are borrowing. For example: if you are buying a house for $100,000 and making a $10,000 down payment, your are borrowing 90 percent of the sales price (90,000/100,000 = .90). Your LTV is 90%. Having a low LTV may improve a persons chances of qualifying when other components (such as good credit) are missing.
• What is a Debt to Income (DTI) Ratio? - Your DTI is the percentage of your monthly income that will go toward your financial liabilities. Typically, we like to see that your liabilities will not exceed 43 percent of your income. However, in some instances, if a person has excellent credit and significant assets, a higher DTI may be acceptable.