Q: HOW DOES THE LENDER DECIDE THE MAXIMUM LOAN AMOUNT THAT I CAN AFFORD?
A : The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. According to the FHA, monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 41% of income. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.

Q:What basic questions do I need to ask about my lender and my loan?
A: Here are questions you should always ask a lender when you are shopping for a loan. Are there any upfront fees and when must they be paid? Are any upfront fees refunded if you're denied a loan? Is private mortgage insurance required and what is the cost? Is an impound account required? How long will loan approval take? Does the loan have a prepayment penalty? Is the loan assumable by another qualified buyer? Will the lender issue a written commitment when your loan is approved? Will the lender require that any necessary termite or other work be completed by closing?

Q:How do I determine whether or not to pay points?
A: It depends on how long you're going to keep the property. If you're anticipating a quick turnover, it will probably save money to take a mortgage with zero or low points. But if you stay in the home longer than you anticipated, a no-point loan could cost you more. Ask your mortgage broker or loan agent how long it will take for the higher interest rate on a no-point mortgage to negate the savings you get by not paying points. If it's five years and you stay longer, the no-point loan will cost you more than if you initially paid points for a lower rate.

Q:How can I avoid private mortgage insurance?
A: If you have a loan amount that exceeds 80 percent of the value of the property, you can avoid private mortgage insurance (PMI) by breaking the mortgage in two. Let's say you have 10 percent down and you can get a first mortgage for 80 percent and a second mortgage for 10 percent of the price. Many lenders will not charge PMI with this financing arrangement. Another way around PMI with a high loan-to-value mortgage is to use a portfolio lender. Portfolio lenders generate loans to hold in their own portfolio, not to sell to other investors. Many portfolio lenders self-insure for PMI. To cover the cost of self-insuring, the lender charges the borrower a higher interest rate. Because mortgage interest is tax-deductible, that can work to your favor. Consult your tax advisor.

Q:How does interest rate moves?
A: There are many factors that influence the moThere are many factors that influence the mortgage interest rate. Three major ones are

• The overall economy
  If the Federal Reserve raises its prime lending rate to curb inflation, banks also raise their lending rates. Rates also tend to rise if there is more demand for home loans, which can slow the housing market and make more homes available. Higher rates can spur on-the-fence borrowers to crowd the home and loan markets. When the economy is slow, consumers and businesses don't borrow as much, leading to lower interest rates. When the economy is booming, demand for borrowed funds increases, leading to higher interest rates.
• Bond market
  Lenders use detailed formulas to determine interest rates based on the performance of the U.S. bond market.
• Commitment
  A written statement from a lender that specifies the amount it's willing to loan you, at what rate and for how long.
• Competition
  The cost of a home loan is sensitive to competition. It pays to shop around for a lender. Let those you contact know you are comparing them with competitors--you may get more favorable loan terms.
  
  

Q:What is tax write-offs?
A: This is one way Uncle Sam encourages home ownership. Home owners get certain tax benefit in tax filing:

• Deductible closing costs
  These include points (loan origination fees) and any prorated or prepaid interest. Points are also deductible if the seller paid them.
• Deductible mortgage interest
  You can deduct mortgage interest on both your primary residence and a vacation home or time-share.
• Maximizing your write-offs
  All property taxes are deductible. If you own a cooperative, you may deduct a portion of the maintenance fee as property tax in certain cases. If you buy a house at the end of the year, it may be more beneficial to close after January 1. Check with your attorney or financial adviser.

Q: ARE THERE ANY COSTS OR FEES ASSOCIATED WITH THE LOAN ORIGINATION PROCESS?
A: Yes. When you turn in your application, you'll be required to pay a loan application fee to cover the costs of underwriting the loan. This fee pays for the home appraisal, a copy of your credit report, and any additional charges that may be necessary. The application fee is generally non-refundable.

Q:WHAT IS A GOOD FAITH ESTIMATE, AND HOW DOES IT HELP ME?
A: It's an estimate that lists all fees paid before closing, all closing costs, and any escrow costs you will encounter when purchasing a home. The lender must supply it within three days of your application so that you can make accurate judgments when shopping for a loan.

Q:CAN I PAY OFF MY LOAN AHEAD OF SCHEDULE?
A: Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.

Q:HOW LARGE OF A DOWN PAYMENT DO I NEED?
A: There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and possibly repairs and decorating.

Q:WHAT ARE DISCOUNT POINTS?
A: Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

Q:WHAT IS AN ESCROW ACCOUNT? DO I NEED ONE?
A: Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property taxes or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.

Q:HOW CAN I FIND OUT INFORMATION ABOUT MY CREDIT HISTORY?
A: There are three major credit reporting companies: Equifax (800-685-1111), Experian (800-682-7654), and Trans Union (800-916-8800). Obtaining your credit report is as easy as calling and requesting one. Once you receive the report, it's important to verify its accuracy. Double-check the "high credit limit", "total loan," and "past due" columns. It's a good idea to get copies from all three companies to assure there are no mistakes since any of the three could be providing a report to your lender. Fees, ranging from $5-$20, are usually charged to issue credit reports but some states permit citizens to acquire a free one. Contact the reporting companies at the numbers listed for more information.