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Typical Mortgage Questions You Might Have
Here are some common mortgage questions you may have.
How Does A Mortgage Work?
A mortgage is a loan for your house. You would use a mortgage to purchase a home. You can also refinance the home in order to gain more favorable terms for your situation, or convert existing home value into cash.
When you get a mortgage, there are two pieces of documentation to sign. The first is a promissory note which goes over the repayment process and specifies your monthly payment and the length of the term. It’s your promise to pay back the loan.
You also sign the mortgage itself which contains these financial details, but also includes the recourse a lender has if you don’t make your payment, laying out specific procedures and penalties. Typically, a lender will have the ability to take the house back if you default on your payments. Once your home is paid off, the lien on your house that allows them to do this is removed.
What Types Of Loans Are There?
Mortgage loans also come in many different flavors. One of the biggest points to know is whether the rate is fixed or adjustable so that it will change over time. Loans also come in a variety of term lengths. The longer the term, the cheaper your monthly payment. The trade-off? You’ll pay more interest than you would on a shorter-term loan.
Another consideration is the investor in your mortgage loan. Conventional loans require a slightly higher credit score than FHA loans, but with a high enough down payment, you can avoid mortgage insurance altogether. Meanwhile, FHA loans will allow you to qualify with a slightly lower credit score than many other options.
Two special programs are USDA and VA loans, both feature the option to get a home loan with no down payment. USDA loans are targeted to encourage development in rural areas or on the outskirts of suburbia. Meanwhile, the VA loans are a benefit for qualifying active-duty service members, reservists, veterans and surviving spouses of those who have been killed in action or passed as a result of a service-connected disability. For those that qualify, the VA loan also offers some of the best interest rates available under any loan option.
How Do I Qualify For One?
When it comes to qualifying you for a loan, mortgage lenders will look at several factors, including income, property, assets and credit (IPAC). Credit is often a good starting point for the discussion. Your credit report is pulled to get a look at your credit score as well as your existing debts. Lenders look at the lowest median credit score of all borrowers on the loan for the purposes of qualification. For FHA, that score is 580 if you’re trying to purchase, lower your rate or change your term. The qualification baseline for most conventional loans is 620.
Beyond credit, income is also very important because it’s compared to your existing debts to get something called your debt to oncome ration (DTI). In order to qualify for the most loan options, you should keep your DTI at no more than 45%, house payment included.
Finally, the lender will look at your property and assets. In the property piece, an appraiser has to make sure the home is move-in ready, safe to live in, as well as assign a value to the property. The lender will also look at your assets to make sure you have money for a down payment. Depending on the investor in your mortgage and the loan purpose (e.g. is this for a primary, vacation or rental property), you may be required to have reserves – savings for a certain number of months of mortgage payments, should you experience a loss of income.
What’s The Difference Between Being Prequalified And Preapproved?
Lenders often use the terms prequalified and preapproved interchangeably, but technically, they mean differnet things.
In a typical prequalification, a lender may or may not pull your credit to get an idea of what loans you qualify for. If they do go through with a credit pull, they’ll see both your median FICO® score and the existing debts reporting on your credit. If they don’t actually proceed with pulling credit, it’s very important to be as honest as possible with the lender about your credit score and any current monthly installment and revolving debt payments. The lender will also ask for verbal or written estimates of both your assets and income.
From there, they are able to give you an idea of how much you can afford, but it’s really just a best guess.
In a proper preapproval, a lender will pull your credit. They’ll also ask you for documentation like bank statements, pay stubs and W-2s so they know exactly what the top end of your budget would be based on an assumed interest rate. Sellers and their real estate agents are much more comfortable with this stronger form of approval.
How Much House Can I Afford?
While being prequalified or getting a verified mortgage approval will help you define the top end of their budget, it doesn’t mean that you should immediately go looking at houses in the upper end of your price range. You don’t want to end up spending so much on your house payment each month that you’re unable to save for any emergencies that might come up. You also want to leave room in your budget for whatever sparks joy in your life. You should still be able to take the occasional trip and go to dinner with friends once a week, if that’s your thing.
You can use your mortgage approval as a starting point for sure, but don’t stop there. Before you hit the pavement to look at homes, you’ll want to take a hard look at your budget as well to determine a house payment you would feel comfortable with. Keep in mind there’s more to your house payment than the mortgage itself (we’ll break down the pieces of a house payment later on), and you also want to save between 1% – 2% of the purchase price for maintenance costs.
If you’re looking for a guideline, it’s generally a good idea to spend no more than 33% of your monthly budget on housing costs. Any more than that, and you might be overextending yourself.
How Much Should I Save For A Down Payment?
There are two different pieces to this. There’s what you’re required to save and then the best down payment for you given your situation. As mentioned earlier, if you happen to qualify for a USDA or VA loan, no down payment is required. If you’re getting an FHA loan, the minimum down payment is 3.5%. If you qualify for a conventional loan through either Fannie Mae or Freddie Mac, down payments start at 3% and in no event would you have to put down more than 5% of the purchase price on a primary residence.
However, there are plenty of reasons to make a higher down payment if you can afford it. On a conventional loan, if you put 20% down, you can avoid having to pay for private mortgage insurance (PMI). Otherwise, you can ask that it be canceled once you reach 20% equity. On an FHA loan, you’ll pay mortgage insurance premiums (MIP) for the life of the loan if you make a down payment of less than 10%. Otherwise, it comes off after 11 years.
Your interest rate is determined in part by a combination of your median FICO® score and the size of your down payment, so holding all other factors equal, a higher down payment should mean a lower rate. Given this, the real answer to this question is that you should put down as much as you can comfortably afford without compromising other financial goals. Just keep in mind you’ll probably have to furnish the house, as well.
What Might My Monthly Mortgage Payment Include?
What’s included in your monthly mortgage payment will differ depending on whether you have an escrow account for your taxes and insurance. Most lenders require this, particularly if you make a down payment of less than 20%.
At a minimum, every mortgage payment will include principal – the amount that goes toward paying off the balance of the loan – and interest. Assuming you have an escrow account, your mortgage payment will also include your property taxes and homeowners insurance, each divided over a 12-month period. If you have mortgage insurance, it’s handled the same way.
Although it may or may not be included in your escrow account, if you’ll be living in a homeowners association your monthly or annual dues are included in your qualification as if they were part of your mortgage payment. Collectively, you can remember the parts of your mortgage payment with the acronym PITIA: Principal, Interest, Taxes, Home Insurance and Home Association fees.
Below, we’ll answer 10 questions you might want to know before you apply for a refinance.
What Types Of Loans Do You Offer?
There are multiple types of home loans. Some of the most common mortgage loan types you might see include:
Conventional loan: The most common type of loan, conventional loan usually conform to Fannie Mae and Freddie Mac’s guidelines.
USDA loan: USDA loans are government-backed loans that allow you to buy a home in a qualifying rural or suburban area.
VA loan: VA loans are government-backed loans for members of the armed forces, veterans and qualifying surviving spouses.
FHA loan: FHA loans are government-backed loans with looser income and credit requirements.
It’s beneficial in some instances to refinance your current loan into a different loan type. For example, many homeowners who have an FHA loan refinance to a conventional mortgage when they reach 20% equity in their property. This allows them to get rid of the mortgage insurance requirement on FHA loans.
Know your loan type and ask us which types of loans we offer. Ask which types of loans would qualify for a refinance as well. This will help you get the most for your money and set you up for payment success.
What Types Of Refinances Are There?
Rate and term refinances: Your mortgage rate is the percentage you pay in interest on your loan. Your mortgage term is the length of time you must make payments on your loan. As the name suggests, a rate and term refinance changes the rate and term of your mortgage loan. For example, you can refinance a 15 year mortgage to a 30 year term. When you refinance your rate or term, your monthly payment changes without changing your principal balance.
Cash-out refinance: A cash out refinance allows you to accept a higher loan balance in exchange for taking cash out of your home equity. For example, let’s say you have a $100,000 principal balance on your loan and you want to pay off $20,000 worth of credit card debt. A cash out refinance would allow you to take out a loan worth $120,000 and your lender would give you $20,000 in cash.
Ask us about the benefits and drawbacks of each. See how much cash you could get from your home.
Apply online with Key Home Group to see your options.
What Do I Need To Qualify For A Refinance?
Every lender has their own standards that you must meet to qualify for a refinance. Ask your lender what standards you must meet in the following areas:
Credit score: Your credit score is a three-digit number that represents your experience managing credit and loans. Your lender should be able to tell you the minimum credit score you need to qualify for each type of loan.
Debt-to-income (DTI) ratio: Your DTI is a percentage that tells your lender how much of your money goes to regular, recurring expenses. You’re less likely to have savings and more likely to miss a mortgage payment if you have a high DTI. Your lender should be able to show you how to calculate your DTI and tell you the maximum DTI you need by loan type.
Home equity: Your home equity is the percentage of your loan principal that you’ve paid off. Most lenders require that you have at least some equity in your home before you can refinance. Your lender should be able to tell you how to figure out your current home equity as well as how much equity you need to qualify for a refinance.
What’s The Difference Between Interest Rate And APR?
The terms “interest rate” and “APR” are often used interchangeably. However, the truth is that these rates aren’t actually the same thing.
Your interest rate is the base percentage that you pay on your loan. Your annual percentage rate (APR) is your interest rate plus any applicable fees and closing costs associated with the loan. When you see two percentages listed side by side, the APR will always be the higher number. This means you should focus on finding the lenders that offer the lowest APRs on comparable rates for the same loan programs.
Do You Offer Rate Locks?
Mortgage interest rates change on a daily basis and can vary wildly depending on how the market is moving. Though refinances take less time than getting your first loan, they still don’t close in a day. A rate lock allows you to lock in your interest rate and keep the same rate while your lender closes your loan. This can protect you against changes in market interest rates and keep your loan predictable.
How Will This Refinance Affect My Monthly Payment?
The type of refinance you choose will affect your monthly mortgage payment. Your monthly payment will go down if you refinance to a lower APR and keep your term the same. If you refinance to a longer term your monthly payment will go down, but you’ll pay more in interest over time. If you refinance to a shorter term your monthly payment will increase, but you’ll own your home sooner.
Your monthly payment usually increases when you take a cash-out refinance. However, if your refinance leaves you with less than 20% equity in your property, you may have to pay for private mortgage insurance (PMI). PMI is a special type of protection that insures your lender if you happen to default on your loan. This can add considerable dollars to your monthly payment, so make sure your lender tells you if they have a PMI requirement.
How Much Equity Can I Cash Out?
You can’t cash out 100% of your home equity except in rare circumstances. Most lenders require that you leave between 10% – 20% of your equity in your property. This can affect your refinancing goals. For example, let’s say that you have $20,000 worth of equity in your home and $18,000 worth of credit card debt to cover. You may want to pay off all of your credit card debt with a cash-out refinance, and if so, you need to find a lender who will allow you to cash out 90% of your equity.
Ask your lender how much of your available equity you can cash out with a refinance. Compare your lender’s percentage to the current equity in your home and see if it’s enough to accomplish your goals. You may want to consider a different lender if you can’t cash out enough equity to pay off your debt or complete the project you want to fund. You can also wait through a few more monthly payments until you have the right amount of equity.
What Types Of Closing Costs Can I Expect?
You must pay closing costs to your lender when you finalize your refinance, just like when you got your original loan. The specific closing costs you’ll pay vary depending on where you live and the lender you choose.
The average refinance has closing costs that are equal to about 2% – 3% of the total value of the loan. Ask your lender what closing costs you’ll likely be responsible for. You should also ask your lender if you have the option to roll your closing costs into your loan’s principal.
What Is A Closing Disclosure?
Just like when you got your original mortgage loan, you’ll receive a Closing Disclosure 3 business days before you close on your refinance. Your Closing Disclosure will include information about your new term, your APR and any closing costs you must pay. You must acknowledge that you had the chance to read and review your Closing Disclosure to your lender before they can schedule your closing meeting.
Ask your lender how you’ll receive your Closing Disclosure and how you can acknowledge it. Also ask your lender to walk you through the closing process. They should be able to tell you what to bring to closing, who will be there and what will happen in the meeting.