Frequently Asked Questions About Loans

How are my interest rates determined?

How do lenders determine my interest rate and how do I get the best possible rate? These are the two main questions associated with every loan. In order to answer them, we must consider the three criteria lenders use to make their decision. 

Credit Rating – The most critical part of mortgage lending is the credit score. It’s not the only aspect considered in lending, but it’s the most important in most cases. Lenders look for multiple late payment occurrences within the last two years. 

Ratios – Next, the borrower’s monthly expense obligations are calculated and reviewed by lenders. This doesn’t include utilities, phone bills, or items generally not found on a credit report. On this basis, two ratios are determined: front-end and back-end. For the majority of lenders, a “grade A” conventional loan is one where a borrower has a front-end ratio of less than 28% and a back-end ratio of less than 36%. For instance, a borrower has a gross income of $4,000, a car payment of $350, a credit card payment of $55, and a house payment of $1,000. Here’s how they’re calculated 

  • $4,000/$1,000 =  25% Front-end Ratio 
  • $4,000/$1,405 = 35% Back-End Ratio 

Down payment – Lastly, lenders factor in the amount of a borrower’s initial down payment. A lower down payment means higher interest rates charged by the lender. Simply put, the more risk a lender has, the higher the rate for borrowers. Say a borrower has excellent credit and wants to put 0% down, their interest rate will usually be about 0.5% higher than a person who puts 10% down. 

After a lender has evaluated the three points mentioned, the borrower’s application must pass specifications set by the department of underwriters for the loan to be approved. 

Discount points – what are they?

Discount points are used to lower interest rates. Lenders usually charge discount points for these two purposes: one discount point equals one percent of the loan’s amount. The discount fee is generally charged as a line item on your Closing Disclosure at the closing table. 

How much should by costs at closing be?

Closing costs can vary depending on the type of loan you choose. Depending on your home state, you generally pay these fees: 

  • Origination: One percent of the amount of the loan – cost of loan established 
  • Discount Points: Can be used to lower interest rate (refer to Discount Points topic above) 
  • Appraisal: Dependent on the size of the house 
  • Credit Report: A charge for getting your credit report from the credit bureaus (refer to question in FAQs regarding credit report) 
  • Underwriting: Payment for the services provided to the end investor 
  • Processing: Payment for the services provided to the lender 
  • Flood Certificate: A certificate stating that your property is not in the 100-year flood zone 
  • Title Charge: Payment for the closing of your loan to the title company 
  • Title Policy: One percent of the purchase price dependent on the state (seller usually pays) 
  • Recording: Payment for filing fees depending on your state 

Several of these costs are charges made by third parties and cannot be negotiated by you or lenders. 

What’s the purpose of a credit report?

An important aspect loan officers consider when helping you choose which lender/program is right for you is to look at your credit. This report aims to pull your credit history out of the three major credit-reporting agencies: Equifax, TransUnion, and Experian. Your lender must use outside companies to get your credit report because they are impartial to the findings. Your account balances and history are verified in your report. You will be provided with your “credit score.” 

What’s the difference between FHA and Conventional Loans?

Unsure about the difference between FHA and Conventional home loans? Want to know which lending program is right for you? We look at Conventional loans vs. FHA loans to review pros and cons of each.

When you look at Conventional loans vs. FHA loans, it can be difficult to know which one is ideal for you. You may be wondering, “What is the difference between Conventional and FHA home loans?” With so many different mortgage programs available, it’s not always obvious which loan you qualify for, how much you can expect to borrow, and what size house you can afford.

We look at the difference between Conventional and FHA home loans to help you understand what they are and how they can help you purchase a new home. Are Conventional home loans better than FHA loans? Read on to find out.