Top Answers to Buyers’ Most Commonly Asked
Inman, May 10, 2023
Obtaining a mortgage is a complex process that can be challenging for even the most sophisticated buyer. Here are Google’s top 10 mortgage questions that buyers ask along with the answers you need to know.
- What is a mortgage?
A residential mortgage is a long-term loan (usually 15 or 30 years in length) provided by a bank, credit union, or other financial institution secured by the property you are purchasing. If you default (fail to make your payments in a timely fashion), the lender may start foreclosure proceedings to force payment of the debt through the foreclosure sale of your home.
- How much can I afford to borrow?
How much you can afford to borrow is contingent upon factors such as your income, credit score, debt-to-income ratio, and down payment amount. Nevertheless, there two basic guidelines that almost all lenders follow,
- Your monthly mortgage payment should not exceed 28 percent of your gross income.
- Your total debt payments should not exceed 36 percent of your gross income.
Using a mortgage calculator can help you determine how much you will qualify for, and the amount of your monthly payment. The Street has identified their top six mortgage calculators you can use to calculate these numbers.
Please note that if you are self-employed or have 1099-income rather than W-2 income, qualifying for a loan may be much more difficult. That’s why it’s crucial to speak to a mortgage professional early in your search process to determine the amount and the types of mortgages for which you will qualify.
- What are the most common types of mortgages?
There are wide variety of loans available to borrowers. Here’s a list of the most common types.
- Government-backed loans
These include Federal Housing Administration (FHA), Veteran’s Affairs loans (VA), and US Department of Agriculture (USDA) loans. Government backed loans offer various types of down payments, interest rates, repayment terms, and eligibility standards.
- Fixed-rate mortgages
Fixed-rate purchase mortgages are typically 15 or 30 years in length with the interest rate being locked for the term of the loan.
- Adjustable-rate mortgages (ARMs):
The rate on ARMs fluctuates based upon changes in the index to which the ARM is based. According to BankRate.com.
ARMs have variable interest rates which float up or down with the fed funds rate. This means if the fed funds rate goes up by a quarter of a percentage point, your ARM rate will increase as well at the next reset. However, there are caps on the amount of interest you’re on the hook for. There are three types of rate caps:
- Initial adjustment cap: This is the maximum interest rate on an ARM, if the rate rises, after the fixed-rate period ends. Usually, 5 percentage points is the maximum amount.
- Subsequent adjustment cap: This is the maximum rate after the initial adjustment.
- Lifetime adjustment cap: This is the maximum interest rate you can be charged over the entire span of the loan.
- Home Equity Loans (HELOCs)
A HELOC is a line of credit secured by the equity in your home. The amount of your equity is calculated by taking the appraised value of your home and subtracting your current mortgage balance.
- Interest only loans
In an interest only loan, none of the principal is paid down. Consequently, most interest only loans either require a balloon payment where the entire principal must be repaid at the end of the loan, or the loan shifts to being fully amortized after a period of being interest only.
- Jumbo loans
According to Bank of America:
A loan is considered jumbo if the amount of the mortgage exceeds loan-servicing limits set by Fannie Mae and Freddie Mac — currently $726,200 for a single-family home in all states (except Hawaii and Alaska and a few federally designated high-cost markets, where the limit is $1,089,300).
Jumbo mortgages are available for primary residences, second or vacation homes and investment properties, and are also available in a variety of terms, including fixed-rate and adjustable-rate loans. A jumbo loan will typically have a higher interest rate, stricter underwriting rules, and require a larger down payment than a standard mortgage.
- What are the interest rates for home mortgages?
Interest rates vary due to a wide variety of factors including the type of mortgage, the length (term) of the loan, your credit score, as well as market conditions including the indexes to which the various types of loans are based. For example:
- The 30-year fixed rate mortgage is currently tied to the 10-year treasury rate.
- The prime rate is a third benchmark usually used for HELOCs. The most widely used ones are the 11th District Cost of Funds, the Federal Discount Rate, and the Fed Funds Rate.
- What are the closing costs and fees associated with getting a mortgage?
Closing costs are the fees and expenses associated with finalizing a mortgage, including loan origination fees, appraisals, fees, title insurance, and escrow fees. They vary based upon the type of loan and the lender. As a rule of thumb, three percent of the loan amount is usually a good estimate of how much the closing costs will be.
Please note that no one can accurately forecast exactly how much your closing costs will be the day you close your transaction. Again, they can only estimate them. The title company or escrow will send you a detailed estimate of the closing costs as required by the TRID, TILA-RESPA integrated disclosures. To learn more about that process, click on the TRID link which will take you to The Consumer Financial Protection Bureau (CFPB).
Other important points to note include:
- Closing costs are in addition to the down payment amount, although in certain situations, they may be rolled into the loan amount.
- Unlike rent, your monthly mortgage payment is paid in arrears. In other words, the payment you make July 1st is for the month of June.
- What is the difference between pre-qualification and pre-approval for a mortgage?
According to the CFPB, a pre-qualification letter is:
A document from a lender stating that the lender is tentatively willing to lend the borrower up to a certain amount. This document is based upon a certain assumptions and is not a guaranteed loan offer.
Rather than settling for a pre-qualification letter, always obtain a pre-approval if possible. According to Bank of America:
Preapproval is as close as you can get to confirming your creditworthiness without having a purchase contract in place. You will complete a mortgage application and the lender will verify the information you provide. They’ll also perform a credit check. If you’re preapproved, you’ll receive a preapproval letter, which is an offer (but not a commitment) to lend you a specific amount, good for 90 days.
Pre-approval is a more in-depth process and provides you with a substantial advantage, especially if you find yourself in a multiple offer situation.
- What are the documents I need to get a mortgage?
The documents required for completing a mortgage application typically include proof of income (W-2 statements, tax returns, and pay stubs), credit history including current credit card balances and monthly payments, employment verification, recent bank statements, and identification (which typically includes your residences for the last 10 years.) Additional documents may be required depending on your financial situation and the type of mortgage you’re seeking to obtain.
- How does the mortgage application process work?
The mortgage application process consists of several steps: pre-qualification, pre-approval, loan application submission, underwriting, appraisal, title search, and closing. Each step involves the collection and verification of various documents and information, culminating in the final loan approval and property purchase.
The process can take as little as 30 days (and sometimes less) although 45-60 days is the most common. If there is a problem with the appraisal, a lien on the property, a title problem, or a different issue, loan approval can take much longer.
Again, obtaining pre-approval is critical, especially prior to writing an offer on any property.
- What happens after I am approved for a mortgage?
After being approved for a mortgage, you’ll receive a loan commitment letter outlining the terms and conditions of the loan. You’ll then proceed to the closing process, which involves signing the loan documents, transferring funds, and ultimately acquiring the property title.
In escrow states, buyers sign their loan documents usually a day or two before the scheduled closing date. After all required documents are signed and the down payment and other closing costs are deposited as a cashier’s check or wired to the title company, the property typically closes the next business day. In other states, the title company handles both the escrow and title functions.
Many states require the buyer and their agent to attend a closing at the title company, usually within 24-48 hours before the property is scheduled to close. The buyers sign their loan documents and deposit the funds required to close the transaction at that meeting.
In attorney states, the process also varies a great deal. For example, New York buyers are required to have an attorney prepare the first draft of the sales contract, to process all other contracts, and to represent the buyer at closing. In New Jersey, the real estate closing process breaks down into four major parts: the attorney review, inspections, the mortgage process, and the final closing.
Since the closing process varies so dramatically across the country, be sure to ask your real estate agent about how the process works in your local area.
- What are the common mistakes to avoid when getting a mortgage?
Some of the most common mistakes buyers make when obtaining a mortgage include:
- Not shopping for the best interest rate.
- Failure to reach out to a mortgage professional to determine exactly how much you can qualify for and whether you are eligible for down payment assistance.
- Not knowing that you must have the down payment plus additional funds for the closing costs.
- If interest rates are rising, failure to lock in your interest rate for 60-90 days when you first apply for a loan.
- Choosing the wrong type of mortgage for your situation.
- Settling for pre-qualification rather than doing the extra work to obtain pre-approval.
- Lack of understanding about how credit scores impact your interest rate and your ability to qualify for a loan.
- Making unnecessary purchases while you have your home under contract. This can include buying furniture or other items for your new home that can negatively impact your debt ratios and even cause you to no longer qualify for the loan you wanted to obtain.
The mortgage process is complex. The best way to be prepared is to review the types of mortgages available, the basic lender guidelines for obtaining a loan, the difference between pre-approval vs. pre-qualification, as well as determining how the closing process works in the area where you are purchasing.