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Frequently Asked Questions (FAQs) on mortgages: Real Estate
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What are Fannie Mae Guidelines?
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What Are RESPA Disclosures?
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What are Fannie Mae Guidelines?
You may have heard your lender or mortgage broker refer to "Fannie
Mae Guidelines" when asking you for documentation supporting your
loan application. They may have explained to you that you must
qualify for the loan under those guidelines. Have you ever wondered
what those rules were and why your loan had to comply with those
regulations?
Fannie Mae is short for the Federal National Mortgage Association.
Fannie Mae is the country's second largest corporation and was
established by an act of Congress in 1938. Fannie Mae was created to
bring stability back to the housing industry after the depression. In
1968, Congress rechartered Fannie Mae as a private company. Congress
mandated that Fannie Mae operate with private capital, be
self-sustaining, and enhance the flow of funds through the secondary
market to homebuyers. It operates under a federal charter, which is
called the Federal National Mortgage Association Charter Act. This
act places certain rights and responsibilities on the company.
Fannie Mae does not directly loan money to you, the "primary"
Borrower, but rather loans money in the "secondary market", or to
lending institutions. In short, by lending money to your lender, this
frees up capital for your bank so they can go on to make more loans.
In order for Fannie Mae to buy single family home loans from mortgage
bankers, savings and loan associations, commercial banks, and other
financial institutions, the loans must conform to their set of
"Fannie Mae guidelines." They require certain "debt to income ratios"
and specific supporting documentation on your employment, assets, and
debts. Normally you will be required to verify two years employment.
If you have a 25% or greater interest in a business, you would be
considered self-employed. An accurate and reliable appraisal will be
required. Fannie Mae requires that lenders use an appraiser who is
licensed following their guidelines.
Fannie Mae only deals with mortgages made to individuals. A
corporation or general partnership would not qualify for a Fannie Mae
loan. Fannie Mae will allow a mortgage that has a co-borrower, and
that person is not required to take title to the property. The income
from the co-borrower will not be accepted for qualifying purposes,
unless that person also signs on the promissory note.
Loans made for your principal residence, second home, or an
investment property, all may qualify under a Fannie Mae loan program.
Fannie Mae sets loan limits with are linked to the Federal Housing
Finance Board's October single-family price survey. These loan limits
are adjusted each year in accordance with the results of this housing
survey. For example, the current loan limit for a single family
residence is $333,700. (except in Alaska, Hawaii, and U.S. Virgin
Islands, which carry a 50% higher limit). Loans made within Fannie
Mae loan limit guidelines are termed "Qualifying" or "Conforming"
loans. They generally carry lower interest rate levels than
"Non-Conforming" or "Jumbo Loans."
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What Are RESPA Disclosures?
RESPA, or the Real Estate Settlement Procedures Act, requires a
lender to give a borrower certain disclosures during the course of
their loan. Some disclosures will list the costs associated with the
closing, other disclosures will outline the lender's closings costs
and escrow account practices. Another disclosure will describe the
business relationship between the settlement service providers. These
disclosures are called "RESPA Disclosures" because they are mandated
by the Real Estate Settlement Procedures Act.
The first RESPA form a Borrower is likely to see is the Good Faith
Estimate of Settlement Costs. The lender will be required to give you
a good Faith Estimate of the settlement charges you will likely have
to pay at closing. The lender will give you a copy of this disclosure
either when you apply for your loan or within the next three business
days after application. You should be aware that the costs listed in
the Good Faith Estimate are only an estimate and the actual costs at
closing may vary from these estimates. The Good Faith Estimate is not
a guarantee, but you can compare the estimated closing costs with the
actual closing costs and ask the lender or closing agent any
questions at the closing.
Your lender will also be required to give you a copy of a Servicing
Disclosure Statement, which will tell you if your lender anticipates
that someone else will be servicing your loan. What this means is
that your lender may not be the agency collecting your monthly
mortgage payments. You must be told when you apply for your loan or
within three business days, if your lender expects this to happen.
If a lender, real estate broker or other party in your closing refers
you to an affiliate for a settlement service, such as when a real
estate brokers refers you to an affiliated mortgage broker, the
referring party is required to give you an Affiliated Business
Arrangement Disclosure. This form will explain that you are not
required to use the affiliate and are free to shop for other
providers, if you choose to do so.
One day prior to your closing, you are given the right to look over
the HUD-1 Settlement Statement. The HUD-1 statement is the final
closing statement for your transaction and will itemize the services
provided to you and all the fees which were charged or credited to
you. If you will not be closing at a settlement meeting, the escrow
agent will mail you your HUD-1 statement after closing and you will
not have the right of inspect the statement one day before the
closing date. Most closings do involve a closing meeting, so
generally you will receive a HUD-1 statement prior to the closing
day.
You may be required to establish an escrow or impound account with
the lender to be sure that your taxes and insurance premiums are paid
on time. You may have to pay an initial amount at closing to start
the account and an additional amount each month, together with your
regular mortgage payment. Your escrow account payments may include a
little extra to ensure that the lender has enough money to make the
payments when due. Under RESPA regulations, your lender may only
collect a maximum of up to two months of escrow payments. At the
closing, or within the next 45 days, the person servicing your loan
must give you an initial escrow account statement. This form will
show all of the payments which are expected to be deposited into the
escrow account and all of the disbursements which are expected to be
made from the escrow account during the year ahead. You should be
sent a disclosure each year which shows the prior year's activity and
any adjustment which is necessary in the escrow payment that you will
make making in the year ahead.
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