I thought it would be helpful to create a post that answers a lot of top “mortgage questions” that consumers tend to ask in one convenient place.
You should know the answers to all of these questions if you’re serious about getting a mortgage and ready to buy a home.
Additionally, you might be better off getting these questions answered by an objective source instead of receiving biased information from a loan officer or real estate agent after the mortgage application process has begun.
So without further ado, let’s get started.
1. What will my mortgage rate be?
2. How long is my mortgage rate good for?
3. How do you calculate a mortgage payment?
4. What is a mortgage refinance?
5. How much will my housing payment really be?
6. When is the first mortgage payment due?
7. What credit score do I need to get approved?
8. What is an FHA mortgage?
9. How large of a mortgage can I afford?
10. Do I need to get pre-qualified for a mortgage?
11. Do I even qualify for a mortgage?
12. Why might I be denied a mortgage?
13. What documents do I need to provide to get a home loan?
14. What does a mortgage broker do?
15. What type of mortgage should I get?
16. How big of a down payment do I need?
17. Do I need to pay mortgage insurance?
18. What are mortgage points? Do I need to pay them?
19. What closing costs are negotiable?
20. How quickly can I get a mortgage?
21. How much is the mortgage lender making off me?
We’ll begin with what always seems to be everyone’s number one concern, saving money. Similar to any other monthly payments you’re attempting to negotiate, it depends on a lot of factors.
But I can at least clear up a few items to give you an idea of how things will go. Ultimately, the more risk you present to the mortgage lender, the higher your mortgage rate.
So if you have bad credit and come in with a low down payment, expect a higher interest rate relative to someone with a flawless credit history and a large down payment.
This is to compensate for greater risk of a missed payment as data proves those with questionable credit and low down payments are more likely to fall behind on their mortgages.
The property itself can also affect mortgage rate pricing – if it’s a condo or multi-unit investment property, expect a higher rate, all else being equal.
Then it’s up to you to take the time to shop around, as you would any other commoditized product.
Two borrowers with identical loan scenarios may receive completely different rates based on shopping alone.
And someone worse off on paper could actually obtain a lower rate than a so-called prime borrower simply by taking the time to gather several quotes instead of just one.
For the record, a Freddie Mac study proved that home buyers who obtained more than one quote received a lower rate.
There is no single answer here, but the more time you put into improving your financial position, shopping different mortgage lenders, and familiarizing yourself with the process so you can effectively negotiate, the better off you’ll be.
And of course you can keep an eye on average mortgage rates to get a ballpark estimate of what’s currently being offered.
To sum it up, compare mortgage rates as you would anything you buy, but consider the fact that you could be paying your mortgage for the next 30 years. So put in even more time!
Once you do find that magic mortgage rate, you’ll probably be wondering how long it’s actually good for.
If you’re not asking that question, you should be because rates aren’t set in stone unless you specifically ask them to be.
By that, I mean locking in the mortgage rate you negotiate or agree upon with the bank/lender so even if rates change from one day to the next, your rate won’t.
Otherwise, you’re merely floating your mortgage rate, and thereby taking your chances. Without a rate lock, it’s really just a quote.
Rates can generally be locked in for anywhere from 15 to 90 days or longer, with shorter lock periods cheaper than longer ones.
At some point in the mortgage process, you’re going to be searching for a mortgage calculator to figure out your proposed payment.
You can see how monthly payments on mortgage loans are truly calculated using the real math, or you can simply find a payment calculator that does all the work and tells you nothing about how it comes up with the final sum.
Just make sure you use a mortgage calculator that considers the entire housing payment, including taxes, insurance, HOA dues, and so forth. Otherwise you’re not seeing the complete picture.
As the name implies, refinancing simply means obtaining new financing for something you already own (or partially own, like real estate).
It’s kind of like a balance transfer where you move your loan from one lender to another to get better terms, except it’s a mortgage payoff.
If you currently have a rate of 6% on your mortgage, but see that refinance rates are now 4%, a refinance could make sense and save you a lot of money.
You’d essentially have one lender pay off your existing loan with a brand new loan at the lower interest rate.
There is also the cashout refinance, which allows you to tap into your home equity while also changing the rate and term of your existing mortgage.
So if you currently owe $200,000, but your home is worth $500,000, you could potentially take out $100k cash and your new loan amount would be $300,000.
Your monthly payments may not even go up if interest rates are favorable, and you’d have that cash to use for whatever you wish.
Be sure to use a refinance calculator or payoff calculator to help guide your decision, and consider the loan term, otherwise known as your expected tenure in the property.
Like I mentioned in the related question above, be sure to factor in all the elements that go into a mortgage payment, not just the principal and interest payment that you often see advertised.
It’s not enough to look at P&I, you have to consider the PITI. And sometimes even the “A.”
If you don’t consider the full housing payment, including property taxes and homeowners insurance (and maybe even private mortgage insurance) you might do yourself a disservice when it comes to determining how much you can afford during the home buying process.
You can check out my mortgage affordability calculator to see where you stand.
Whether you have an escrow account or not, mortgage lenders will qualify you by factoring in taxes and insurance, not just your monthly mortgage payment.
This depends on when you close your home loan and if you pay prepaid interest at closing.
For example, if you close late in the month, chances are your first mortgage payment will be due in just over 30 days.
Conversely, if you close early in the month, you might not make your first payment for nearly 60 days.
That can be nice if you’ve got moving expenses and renovation costs to worry about, or if your checking account is a little light.
It depends what type of mortgage you’re attempting to get, and also what down payment you have, or if it’s a purchase or a refinance.
The good news is that there are a lot of mortgage programs available for those with low credit scores, including VA loans and FHA mortgages.
For example, the FHA goes as low as 500 FICO, Fannie and Freddie 620, and the USDA and VA don’t technically have a minimum credit score, though most lenders want at least 620/640.
If you’re in good shape financially, a poor credit score may not actually be a roadblock.
But you can save a lot of money if you have excellent credit via the lower interest rate you receive for being a better borrower.
Simply put, loan rates are lower if you’ve got a higher credit score.
Speaking of credit scores, FHA loans have very accommodative credit score requirements. We’re talking scores as low as 580 that require just a 3.5% down payment.
That’s pretty flexible. Of course, conventional mortgages can be had with just a 3% down payment, though a 620 credit score is needed.
FHA stands for Federal Housing Administration, a government agency that insures the mortgage loans to help low- and moderate-income borrowers achieve the dream of homeownership.
They are commonly utilized by first-time home buyers, but available to just about anyone, unlike VA loans, which are reserved for veterans and active duty military only.
One downside to an FHA loan is that mortgage insurance is required, regardless of down payment.
Here you’ll need to consider home values, how much you make, what your other monthly liabilities are, what you’ve got in your savings account, and what your down payment will be in order to come up with your loan amount.
From there, you can calculate your debt-to-income ratio, which is very important in terms of qualifying for a mortgage.
This is a fairly involved process, so it’s tough to just estimate what you can afford, or provide some quick calculation.
There’s also your comfort level to consider. How much home are you comfortable financing?
And don’t forget the property taxes and insurance, which can make your housing payment much more expensive!
That brings up a good point about getting pre-qualified.
It’s an important first step to ensure you can actually get a mortgage, while also determining how much you can afford. Two birds, one stone.
A more involved process is a mortgage pre-approval, where you actually provide real financial documents to a bank or mortgage broker for review, and they run your credit.
Real estate agents typically require that you be pre-approved if you want to make a qualified offer.
Oh yeah, here’s an important one. Are you actually eligible for a mortgage or are you simply wasting your time and the lender’s?
While requirements do vary, most lenders require two years of credit history, clean rental history, and steady employment, along with some assets in the bank.
As mentioned, getting that pre-qual, or better yet, pre-approval, is a good way to find out if the real thing (a loan application) is worth your while.
However, even if you are pre-approved, things can and do come up that turn a conditional approval into a denial letter, such as an undisclosed credit card, personal loan, auto loan, or pesky student loans.
It’s not 100% until it funds.
There are probably endless reasons why you could be denied a mortgage, and likely new ones being realized every day. It’s a funny business, really.
With so much money at stake and so much risk to lenders if they don’t do their diligence, you can bet you’ll be vetted pretty hard.
If anything doesn’t look right, with you or the property, it’s not out of the realm of possibilities to be flat out denied.
Those aforementioned student loans or credit cards can also come back to bite you, either by limiting how much you can borrow or by pushing your credit scores down below acceptable levels.
That doesn’t mean give up, it just means you might have to go back to the drawing board and/or find a new lender willing to work with you. It also highlights the importance of preparation!
In short, a lot of them, from tax returns to pay stubs to bank statements and other financials like a brokerage account if using assets from such a source.
This process is becoming less paperwork intensive thanks to new technologies like single source validation, but it’s still quite cumbersome.
You’ll also have to sign lots of loan disclosures, credit authorization forms, letters of explanation, and so on.
While it can be frustrating and time consuming, do your best to get any documentation requests back to the lender ASAP to ensure you close your home loan on time.
And make sure you always send all pages of documents to avoid re-requests.
In short, a mortgage broker is a knowledgeable individual who can guide you through the mortgage process, and do so by shopping your loan scenario with any number of lender partners, instead of just one.
They are middlemen that connect mortgage lenders to borrowers, as opposed to you working directly with a retail bank/lender.
If you’ve been denied in the past, or have a tricky scenario, a mortgage broker could be just the ticket to get that loan approval.
They may also provide a more personal experience if you want a hands-on approach as opposed to say a call center or big bank.
There are a lot of loan options, including fixed-rate mortgages and adjustable-rate mortgages, along with conventional loans and government loans, such as FHA and VA.
While most homeowners just default to the 30-year fixed, there are plenty of other loan programs available, and some may result in significant savings depending on your plans.
For example, a 5/1 ARM might come with an interest rate 0.75% below a 30-year fixed, and it’s still fixed for the first five years.
You might want to start with the fixed rate vs. ARM argument, then go from there.
If you’re comfortable with an ARM, you can explore the many options available.
If you know fixed is the only way to go with a home loan, you can determine whether a shorter-term option like the 15-year fixed is in your budget and best interest.
Also consider the FHA vs. conventional pros and cons to ensure you’ve covered all your bases if trying to decide between those two loan types.
That depends on a lot of factors, including the purchase price of the home, the type of loan you choose, the property type, the occupancy type, your credit score, and so on.
I can tell you that there are still zero down mortgage options available in certain situations, including for USDA and VA loans, and widely available 3% and 3.5% down options as well.
In short, you can still get a mortgage with a relatively small down payment, assuming it’s owner-occupied and not a vacation home or investment property. Just make sure you can afford the higher monthly payments!
Good question. The answer coincides with down payment and/or existing home equity, along with loan type.
Basically, you want to be at or below 80% loan-to-value to avoid mortgage insurance entirely, at least when it comes to a home loan backed by Fannie Mae or Freddie Mac.
That means a 20% down payment or greater when purchasing a home, or 20%+ equity when refinancing a mortgage.
However, the FHA is sticking it to everyone regardless of down payment, so if you get an FHA loan, mortgage insurance is unavoidable.
And even if mortgage insurance isn’t explicitly charged, you can argue that it’s built into your interest rate or closing costs if you aren’t at 80% LTV or lower.
This is yet another reason to come to the table with a larger down payment if at all possible.
The choice is yours when it comes to points, though it does depend on how the lender or broker defines points. Are they discount points or a loan origination fee?
In either case, you’re going to pay something when you take out a mortgage to ensure the salesperson and/or company gets paid. It’s definitely not free.
Of course, these points can be paid directly and out-of-pocket, or indirectly via a higher mortgage rate and/or rolled into the loan.
This is part of the negotiation process, and also your preference.
Many closing costs are negotiable, including some third-party fees that you can shop for like title insurance.
If you look at your Loan Estimate (LE), you’ll actually see which services you can shop for and which you cannot.
Then there are the loan costs, which you can also negotiate. But not all lenders will budge. And some may not charge an outright fee, as it will be built into the rate. And yes, you can negotiate rates too.
Also watch out for junk fees or redundant fees or anything else out of the ordinary.
You have every right to go through each and every fee and ask what it is and why it’s being charged. And they should have a good answer.
This is an easier mortgage question to answer, though it can still vary quite a bit.
In general, you might be looking at anywhere from 30 to 45 days for a typical residential mortgage transaction, whether it’s a mortgage refinance or home purchase.
Of course, stuff happens, a lot, so it’s not out of the ordinary for the process to take up to 60 days or even longer.
At the same time, there are companies (and related technologies) that are trying to whittle the process down to a couple weeks, if not less. So look forward to that in the future!
Instead of worrying about how much the lender is making, worry about how good your offer is relative to everything else out there.
I don’t know how much Amazon makes when I buy a TV from them, but I might know that their price was cheaper than all other competitors.
Same goes with a mortgage. Is the rate the lowest around when you factor in the closing costs? If so, it might not really matter what they’re making. Maybe everyone wins.
As long as you take the time to shop, negotiate, and structure the deal to your liking, you should be able to sleep at night.
If you want other common mortgage questions answered, leave a comment, drop me a line, or take a look around the site. There’s plenty to read and many of the answers you’re looking for may already be here.
(photo: Véronique Debord-Lazaro)