Buying and closing on a home can be quite a process, but knowing the right questions to ask can go a long way to help you prepare. Whether you’re a first-time homebuyer or have purchased a home before, having a good knowledge base can help you work more confidently with your lender.
With that in mind, here are 32 frequently asked mortgage questions, along with their answers.
1. What is a mortgage lender?
A mortgage lender is a licensed company or organization that issues loans to customers. The mortgage lender specializes in home loans. The lender may be a private company or a bank.
2. What’s the difference between a mortgage broker and a direct lender?
A broker is a third-party, licensed professional who acts as a go-between for the lender and the customer. The lender works a bit like a travel agent in that they handle the paperwork and lender shopping. A direct lender is a bank or private company that issues loans directly to the customer.
3. What documentation should I gather?
Over the course of the loan process you’ll need to provide:
- W2 forms
- Tax returns
- Three months of paystubs
- 1099s (if applicable)
- Proof of alimony or child support payments (if appropriate)
- Proof of debts (student loans, credit card, other loans)
- Inventory of assets (bank statements, investment statements, auto title, etc.)
- Bankruptcy paperwork (if applicable)
- Personal ID
When in doubt, err on the side of gathering too much information. It will save time if the lender asks for more later.
4. How do I get approved for a mortgage?
Mortgage approval can be a lengthy process. You’ll need to fill out an application and submit proof of income and other documents. The lender will do some research (including a credit check) before determining if you qualify for a loan. They will also tell you how much you are eligible for. Lenders consider your income, debt-to-income ratio, credit history, and credit score.
💡 Important to keep in mind: Just because you qualify for a loan doesn’t mean you will automatically get one.
In fact, last year my husband and I were in the process of purchasing a home. We were pre-approved for a loan and even under contract on the house. A few weeks before closing, my husband was involved in a car accident (other driver’s fault). Our car was a total loss, and we had to take out a loan to get another car (we’re a single-car family, so delaying the purchase wasn’t an option). Even though we took out a loan with payments that exactly equaled what we were paying for the other car, the lender denied our home loan because of the car loan inquiries. It was super annoying, so once you start the loan process, you’ll want to be very careful about your spending habits.
5. How long are you pre-approved for, and what is conditional approval?
Most pre-approval letters are valid for at least 60 to 90 days. You can extend the length of the pre-approval by updating documents or speaking with your lender. Conditional approval means that you are pre-approved for a loan so long as you meet specific criteria, which may involve paying off an outstanding debt or fixing something on your credit report.
6. Do I need excellent credit to get a mortgage?
You don’t need perfect credit, but your credit score and credit history should be as clean as possible to qualify for the lowest rates. Some lenders will offer you a loan with a score as low as 580. However, the interest rates will likely be very high, and not all lenders are willing to go that low.
My husband and I have credit scores significantly higher than 580, and we still lost out because we were 10 points shy of the lender’s preferred score (thank you, car accident). Additionally, keep debts as low as possible, as the amount you owe can seriously affect your ability to get a home loan.
Lenders want to know you have enough money to pay your bill and that you are responsible enough to make your payments on time.
7. Does my spouse’s credit score matter?
It depends. If your spouse will be a co-signer on the home loan then the lender will want to look at their credit score, and it may affect your ability to obtain a home loan. If you feel you may be on the border of qualifying, opt to have the spouse with the higher credit score act as the primary applicant.
8. Will lenders do a hard credit check on me?
Yes. To qualify for a loan, you will need to give the lender permission to pull your credit score. This type of inquiry is known as a hard-pull and it will likely ding your credit score by a few points. However, if the lender approves your loan, your score will likely go right back up. Avoid applying for multiple loans or the additional inquiries can hurt your score significantly (see our nightmare story above).
9. What’s the difference between a mortgage pre-approval and a pre-qualification?
According to the Consumer Financial Protection Bureau, pre-qualification and pre-approval are very similar. The main difference is the legal terminology. Both letters tell sellers that the lender will likely lend to you. However, pre-qualification is merely a nod of approval saying that your overall credit health looks excellent and you are likely to receive a home loan.
💡 Simply: pre-qualification is a watered-down pre-approval, and you don’t need to worry too much about which word lenders use.
Pre-approval requires more documents to prove what you are claiming. A pre-approval is a more solid option when you’re ready to purchase, especially if you’re in a hot market.
10. What happens after you’re pre-approved for a mortgage loan?
Once you receive pre-approval for a home loan, you can comfortably shop for your dream house. Once you go under contract on the home, the lender will finish the approval process (double checking your finances and looking for anything they may have missed the first time around.)
The home will also undergo an appraisal so the lender can decide if the house is worth the investment (they usually won’t lend for more than a home is worth). If they find everything in order, they will approve the loan for your home purchase, and you can move forward with closing on your home.
Note: It can be a month or more for the lender to approve the final purchase.
11. Types of mortgages (and what they mean)
Fixed rate: A fixed rate loan has the same interest rate over the entire course of repayment. This means the monthly payment also stays the same.
Adjustable rate (ARMS): The interest rate on this type of loan changes occasionally (usually once a year after one-year of fixed). The rate can go up or down, and monthly payments may adjust as well.
FHA Loan: The FHA Loan (Federal Housing Administration) allows buyers to make down payments as low as 3.5 percent. Borrowers must pay for mortgage insurance on this type of loan. An FHA loan is available to lots of borrowers, though it’s a popular choice for first-time home buyers.
VA Loan: Veterans and their family members (specifically the un-remarried widow or widower of a fallen military member) qualify for VA loans. Veteran’s Affairs ensures this loan against default. If you are eligible for a VA loan, you may not have to pay a down payment at all.
USDA/RHS Loan: The USDA/RHS loan helps residents or rural neighborhoods obtain financing for a home loan. To qualify, you must have a steady income no higher than 115% of adjusted area median income in your county.
Jumbo: A jumbo loan is a mortgage loan that exceeds conforming loan limits, according to the Home Buying Institute. The amount that qualifies as a jumbo loan differs by state. For example, in Los Angeles, a loan of $679,650 qualifies as a jumbo loan, but in most other states it’s $453,100. Jumbo loans are higher risk, so you’ll need to have a sizable down payment and an excellent credit score.
Conforming: A conforming loan is merely a loan that falls into the traditional requirements set up by Fannie Mae and Freddie Mac.
Good to Know: A single loan typically falls into multiple categories (for example, a conforming, fixed-rate FHA loan.)
12. What type of mortgage is best for me?
The short answer: the loan you qualify for. However, just because you are eligible for a loan doesn’t mean you should take it. You’ll need to look at the pros and cons of taking out loans with a higher interest rate (including higher monthly payments) or a longer repayment term (you pay more over the course of the loan).
13. Interest rates: What’s typical, and how do I find out what mine is?
Loan interest rates change regularly. As of publication, the average 30-year fixed rate loan was 4.73%, and the 5/1 ARM (adjustable) was 4.10%. The highest rate was 19% in 1981. But, since the housing crisis in 2008, the rates have stayed under 6%. In 2017, the average reported rate was around 4.1%.
There are a few ways to estimate what your interest rate is likely to be using online calculators, but your best option would be to chat with your lender. They will be able to give you a better idea of how low or high your rate could likely be.
14. Is there anything I can do to lower my interest rate?
If you are preparing to buy a home, you can lower your future interest rate by improving your credit score. Even a difference of 10 points can reduce your rate. Additionally, you could provide a larger down payment on the loan.
If you already have a home loan, you may consider refinancing for a lower rate. You’ll want to talk to your lender to determine if it’s an appropriate time or if you should wait a little longer for the rates to adjust.
15. When can I lock the interest rate, and will it cost me extra?
If you are in the process of purchasing a home and you suspect the interest rates are about to change, you can pay your lender to lock in your interest rate. This means that even if rates jump before the lender processes the loan, yours won’t change. The fee is typically between .5 percent and 2 percent of the total loan.
There are pros and cons to opting for a price lock. You could potentially save money if interest rates soar. However, interest rates could drop (which means you could be paying more than you thought). Additionally, the rates might not change at all, and you could still have a few thousand dollars tagged onto your loan.
16. Should I choose a fixed-rate or an adjustable-rate mortgage?
There’s no perfect answer. Adjustable rate loans may be easier to qualify for, but when the interest rate changes, so do your monthly payments. From a budgeting perspective, this can be a pain. If you do consider an adjustable-rate mortgage, do a bit of research first. You’ll want to know how often the rate adjusts, if there is a cap on the highest interest rate, and the maximum your rate can go up each year.
💡 Adjustable rate mortgages can be lower than fixed rates, but you sacrifice the possibility of lower rates for the consistency of a fixed-rate.
17. How much down payment do you need for a mortgage?
In a perfect world, and according to most financial experts, you would have at least a 20 percent down payment. On a $300,000 house, that’s $60,000. But, if you qualify for an FHA loan, you may be able to place as little as 3.5 percent or $10,500 on a $300,000 home, so the amount you’ll need for a down payment is dependent on the type of loan you qualify for and secure.
18. What kind of down payment assistance is available, and how do I know if I qualify?
There are a few down payment assistance programs available for the average home buyer, including:
FHA Loan: This type of loan requires a much lower down payment (as low as 3.5 percent) even with a lower credit score.
VA Loan: The VA loan may eliminate the need for a down payment entirely. If you qualify (as an active-duty or retired veteran), this should likely be your first choice.
The Good Neighbor Next Door: Housing and Urban Development sponsor aid for individuals who work as police officers, firefighters, emergency medical technicians, and teachers (pre-k through high school age). This program can reduce the cost of a home by up to 50 percent in some areas.
FHA Section 203 (k): This program targets fixer-upper homes. If your budget only allows for a home in need of a fair amount of repairs, you can borrow funds to help complete the work alongside your mortgage. Down payments on these loans can be as low as 3 percent.
Local help: Each state and county have their own agencies that can help with down payment assistance. You can find a list of these approved agencies from the Housing and Urban Development Department, also known as HUD.
19. How do I calculate what my monthly mortgage payment will be?
If you’re like me, you’ll probably just pull up an online mortgage calculator. Enter a few numbers for the loan amount, length of repayment, and interest rate, and the calculator estimates the monthly payment (and total cost of the loan) for you.
Personally, I’m not a fan of math and like the automatic results from using a calculator, but if you must do it by hand, here’s the formula:
M = P [ r(1 + i)^n ] / [ (1 + r)^n – 1]
M = your monthly mortgage payment
P = the principal amount
r = your monthly interest rate, calculated by dividing your annual interest rate by 12
n = is your number of payments for the life of the loan (the number of months you’ll be paying the loan)
Example using this formula
Let’s say you have a $100,000 mortgage loan with 6 percent annual interest over 15 years.
“P” would be $100,000.
Then, “r” would be your monthly interest rate of 0.005 (0.06 divided by 12 = 0.005 percent).
For “n,” you’ll calculate the total number of payments by multiplying 15 years x 12 months = 180 payments.
Plugging the numbers into the formula above would look like this:
M = $100,000 [ 0.005(1 + 0.005)^180 ] / [ (1 + 0.005)^180 – 1]
After simplifying, we can estimate that your monthly mortgage payment will be $843.90.
Knowing how to calculate this payment is nice, but if you ask me, I’m sticking with a mortgage calculator!
20. Can my monthly payments change over time?
If you have a fixed-rate mortgage, your payment will not change over time. You will pay the exact amount every month until you pay off the loan.
If you opt for an adjustable rate mortgage, your monthly payment can (and likely will) change. Monthly payments may also change if you take out a home equity loan before you finish paying off your mortgage.
21. What is mortgage insurance, and will I have to pay it?
Mortgage insurance protects the bank in case you cannot finish paying off your loan. The policy pays the bank or lender the money they loaned you in the event that you default on the loan.
You can avoid paying the PMI (private mortgage insurance) by putting at least 20 percent down on the home at the time of purchase. Alternatively, you can ask the lender to cancel the PMI once you’ve made enough payments to bring your mortgage balance to 80 percent of the home’s original value.
If you don’t ask, lenders are legally required to cancel the PMI once your loan total reaches 78 percent of the initial cost.
22. What is an origination fee, and will I have to pay one?
The loan origination fee is a processing charge. The lender charges you for putting the loan together. The total is usually .5 percent to 1 percent of the total loan amount.
This fee compensates the lender for the work they put in, so while you can likely lower the origination fee, you may not be able to eliminate it entirely unless you give in somewhere else (like taking a higher interest rate).
23. What are discount points, and should I pay them?
Discount points are basically fees you pay to the lender to lower the total interest rate. Each point equals one percent of the interest rate, and there is usually a limit of two points.
💡 Each point costs 1 percent of the total loan, so, for a $300,000 loan, that’s $3,000 per point.
If you plan to stay in your home for a long time, purchasing points could save you money over the course of the loan. If you could move within a few years though, you’re better off staying with the higher interest rate.
24. What are closing costs, and how much should I expect to pay?
Closing costs include origination fees, agent fees, credit report charges, deed-recording, title insurance, surveys, taxes, and appraisal fees. Your lender should give you an estimate of the cost within 3 days of your loan application.
Average closing costs on a $300,000 house are around $15,000.
Typically, the buyer pays most of the closing costs. However, some buyers can negotiate so that the seller pays some or all of the closing costs. You may include the closing costs in your mortgage or pay some or all of it out of pocket.
25. What is escrow and how does it work?
You’ll probably hear the word “escrow” used for multiple purposes in real estate. During the sales process, the buyer may have to deposit cash into an escrow account when they go under contract. This is typically between $250 and $500 and acts as a good-faith payment. The seller would put the deed to the home in escrow at this stage. The money in the account goes to closing costs or the purchase of the house on closing.
Some lenders may require that a homeowner use an escrow account to put towards property taxes and insurance. If this happens, the escrow funds may be built into your monthly payment.
26. How long does it take to close a mortgage?
Each transaction is different. However, the average time between going under contract to closing is four to six weeks. Errors in the application process, or missed deadlines, can lengthen the process.
27. Why does it take so long to close a mortgage?
There are several steps that go into closing on a home including inspection and appraisal. The lender then must make sure the house has a clear title (no liens from creditors) before they will give you money for that property.
During our disaster of a house hunt, we attempted to purchase a home that was in foreclosure. Three months into the process we still hadn’t closed because the lender kept finding more liens.
💡 Good to keep in mind: Foreclosures can take forever, so if you’re looking at that kind of property, patience is key.
After the title search, appraisal, and inspection, the loan goes through underwriting. This step can be frustrating if the lender requests additional documents. Remember that multiple people are handling your mortgage and the shuffle can extend the time it takes as well.
28. How long will it take to process my loan application? Is there a guarantee that it will close on time?
It depends. In the best-case scenario, you’ll have a decision on your mortgage loan in 72 hours. This initial approval is likely conditional, meaning additional documentation will need to be provided before the final decision is final. In most cases, this other documentation includes an inspection and appraisal.
As far as guarantees go – unfortunately, there are no guarantees. If the deadline is getting a little too close for comfort, you can ask the seller for an extension. Most sellers are likely to agree to help ensure a smooth process. Signing additional paperwork is required in most cases, but it can also buy you a few extra days or weeks for the bank to finish their end of the deal.
Lenders do try to approve loans as quickly as possible, but they may have a backlog of applications to work through.
29. What might hold up approval of my loan?
Surprisingly, there are quite a few things that can delay your loan including:
- Missing paperwork
- Title search turns up liens or other issues
- Appraisal comes back too low (meaning you’re offering to pay more for the property than it’s worth)
- Changes in your credit report or job status
30. Should I get a 15-year or 30-year term loan?
There are benefits to both 15-year and 30-year loans. In my experience, most financial experts tend to recommend a 15-year loan, if you can swing it. Your monthly payment will be higher, but you will pay less on the total loan. A 30-year mortgage makes it easier to afford a home (due to lower monthly payments), but your overall repayment is higher.
Example of a 30-year term loan: Let’s say you take out a $300,000 fixed-rate loan at a 4 percent interest rate. Your monthly payment will be about $1,400 per month. Over the course of the loan, you’ll pay $515,609 (an estimated $215,000 in interest) with a 30-year mortgage.
Example of the same loan, on a 15-year term: If you use the same numbers for a 15-year loan, your monthly payments are $2,219, but your total loan cost is only $399,431 (an estimated $99,431 in interest.)
31. Can I prepay my mortgage, and if so, is there a prepayment penalty?
The simple answer: sometimes.
Before you start tossing money at your mortgage, ask if there is a prepayment penalty. Banks want to make money, so they often throw on a penalty to discourage people from paying off their loan faster. If there is a prepayment penalty, ask how much. You may have to pay upwards of $10,000 on a $300,000 house. It might still be a good move if you’re going to save more than that in interest payments.
Important: Don’t just send extra payments to your lender and assume they’re applying it to the principal. My mom did this and couldn’t figure out why her loan balance wasn’t going down. Turns out they were taking the checks as “early” payments, and just delaying her next due date. You’ll have to specify that you want the money applied to the principle.
32. How much house can I afford?
Knowing your budget is the best place to start, hands down.
The rule of thumb is that your monthly payment should be equal to or less than 28 percent of your pre-tax income (a.k.a. gross income). So, if you make $6,000 per month before taxes, this rule of thumb suggests sticking with a mortgage payment of no more than $1,680.
Taking it a step further, the rule of thumb suggests spending up to an additional 4 percent of your income to cover homeowner’s insurance, PMI, property taxes and association fees. Taking both into account, it’s suggested to spend no more than a total of 32 percent of your gross income on housing.
To give you an idea of the figures, here are a few calculations:
- 32 percent of $40,000 gross income = $1,066
- 32 percent of $80,000 gross income = $2,133
- 32 percent of $120,000 gross income = $3,200
- 32 percent of $160,000 gross income = $4,266
While these percentages should be seriously considered, it’s important to keep in mind that they are only suggestions. Committing a higher percentage of your gross income to housing is likely a stressor you’ll want to avoid, but going lower than the suggested percentages could save you money and stress in the long-run by shortening your mortgage loan repayment process.
Source: Finance Buzz / Featured image by jcomp – www.freepik.com