What is a Mortgage?
Everything you need to know about mortgages.
Everything you need to know about mortgages.
The legal document defines all the terms and conditions of the loan and what happens if you fail to repay. If you are ever looking for a copy of your mortgage, you can find it filed in the county records as a legal claim against the home, otherwise known as a lien.
A promissory note is a financial document you’ll see and sign early on in the mortgage process. This signed document is your promise that you’ll repay your loan, with interest, over an agreed period and at a specified rate.
When you sign a promissory note, what you are saying is that you will pay back the money you’re borrowing to the lender. For obvious reasons, a bank or major lender can’t merely rely on somebody’s word that they will pay them back. They have to get it in writing. Some terms you may see contained in a promissory note that should be defined are:
What you might find interesting is that anyone, not only a bank or major lender, can issue a promissory note if they are lending money. Continue reading below to understand the difference between a secured promissory note and an unsecured promissory note.
If there’s a physical, tangible item involved in the loan like a home or a car, you’re signing a secured promissory note. Any item of value that you’re using the loan to purchase is considered collateral, and this collateral secures the loan.
On the other hand, if you’re signing an unsecured promissory note, there isn’t a physical item of collateral involved. With an unsecured promissory note, the loan is lent to you purely with the understanding that you will be able to pay back the full amount plus interest.
You’ll find that with major banks or commercial lenders use secured promissory notes when dealing with loans for large amounts of money.
Unsecured promissory notes are generally used in instances of small loan amounts between relatives, friends, or any lender who most likely is not a bank or official financial institution.
Contrary to what you probably thought, Fannie Mae and Freddie Mac are not somebody’s interesting aunt and uncle. These are the names of GSEs or government-sponsored entities, which are private companies sponsored by the government in the U.S. mortgage industry.
The United States government sponsors GSEs like Fannie Mae and Freddie Mac because they are essential to the entire U.S. economy.
Interestingly, Fannie and Freddie compete against each other and share nearly the same business model. They purchase mortgages from lenders on the secondary market. After this, investors buy the mortgages from these GSEs. When the investors buy the mortgages, they are converted into securities that act as brilliant investments on the open market backed by mortgages.
If all of that was a little confusing, you’re not alone. The main takeaway here is that Fannie Mae and Freddie Mac are government-sponsored entities, and they are vital to the U.S. economy for several reasons.
Fannie and Freddie both purchase mortgages from different financial institutions. Fannie purchases loans from credit unions, big banks in the commercial finance industry, and mortgage brokers. Freddie, on the other hand, buys the smaller loans. You’ll see Freddie Mac purchase loans from original lenders who are smaller and sometimes referred to as “thrift banks.” Both Fannie and Freddie are a vital part of the mortgage industry. Their role in moving money through the US Housing economy helps to assure that mortgages are affordable and accessible to homebuyers.
The problem with purchasing a home is most people don’t have hundreds of thousands of dollars in their bank account to just outright pay for a house. That’s where banks enter the picture. Home loans, also known as mortgages, can be quite a large amount of money, often hundreds of thousands of dollars. Typically, a borrower will repay their mortgage over 15- 30 years. With so many borrowers and such a long time before they can profit from a loan, a bank or lender could easily run out of money.
Fannie Mae and Freddie Mac work with banks or lenders, not directly with borrowers. Fannie and Freddie purchase mortgages from banks so that the banks can turn a quick profit. Then the bank has enough capital necessary to lend to borrowers again. Fannie Mae is the GSE who buys mortgages from private commercial banks, like Wells Fargo, Chase, and Bank of America. Freddie Mac is the GSE who buys mortgages from smaller banks, or “thrifts.”
The mortgage debt bought by Fannie and Freddie is then sold to investors as mortgage-backed securities (MBS). Frequently these securities will take the form of an agency bond. Agency bonds are attached to the mortgage market and function differently from corporate or government bonds. Generally, they require a minimum investment of $25,000. These bonds are guaranteed by Fannie and Freddie when they are sold to investors. So if a borrower defaults on their payments, Fannie and Freddie will have to pay the investor instead of the borrower.
Prequalification is when a bank or lender will ask you to provide them with a current snapshot of your financial health. This is going to include your credit, score, debt, income, and assets. Once the lender can review your financial standing, they give you an estimate of the amount you can look forward to borrowing.
It’s pretty simple to get prequalified. Generally, for a prequalification, there is no cost involved. You can do it over the phone, and typically it takes between one to three days to get your prequalification letter.
Pre-approval is the definitive answer in demonstrating your creditworthiness. Pre-approval is also the next step after prequalification. There is so much more that goes into getting pre-approved, and because of this, it carries more authority.
To get pre-approved, you’ll need to fill out an official mortgage application, and you must provide your mortgage lender with the required documentation so they can conduct a complete check on your financial history and current credit scores. Your lender will be able to pre-approve you for a specified mortgage amount after reviewing your overall financial health. Another benefit of pre-approval is that you’ll have a much better idea of the interest rate you’ll be charged. Your loan interest rate is often based on your credit score, and after pre-approval, you could have an opportunity to lock in an interest rate. Be aware that some lenders do charge an application fee for pre-approval.
In a word, no: prequalification is not the same as pre-approval.
If you’re looking to purchase a home, you’ve likely been told that you should get prequalified or pre-approved for a mortgage. These are two critical steps in the mortgage process. Despite how similar they sound, prequalification and pre-approved are two distinct functions with crucial differences.
Prequalification is the first step before pre-approval. Getting prequalified allows you to learn how large of a loan you will potentially qualify for. After doing this, pre-approval is the next step. Pre-approval is a conditional commitment to grant you the mortgage.
The answer is simple: Step one is always prequalification. Step two is pre-approval.
If you get lost, just remember Q&A. Q before A. Pre-Q before Pre-Approve. And if you forget again, you know, just save this website.
It’s important to remember that prequalification happens without an examination of your credit report or a deep dive into your ability to purchase a home. Prequalification is determined simply on the data you provide to a lender; therefore, if you’ve given false information to the lender, your prequalified loan amount doesn’t mean anything.
As a potential homebuyer, you will find that most major lenders offer a few popular loan types: Conventional, Jumbo, FHA, and VA loans. An additional loan type available for eligible rural and suburban homebuyers is a USDA Home Loan. Each loan is designed to benefit homebuyers in different ways. Not every loan type will be right for you, so it’s essential to do your research upfront.
A conventional mortgage is a mortgage product that follows conforming guidelines and is not guaranteed or insured by a government organization. Conventional home loans are available through individual lenders, Fannie Mae, or Freddie Mac.
You can use either a conforming or non-conforming loan to obtain a mortgage. The GSEs mentioned above, Fannie Mae and Freddie Mac, set guidelines that restrict loan limits. A loan that is underneath the loan limits is considered a conforming loan type. The loan limits are put in place because these entities must buy and package the loans for investors before they sell them in the secondary market.
A loan made above the conforming loan limit amount is called a jumbo loan. U.S. home prices have risen so high in some areas that many buyers need jumbo loans to finance them. The term jumbo in the home loan world refers to loans that exceed the limits set by the government-sponsored enterprises Freddie Mac and Fannie Mae. This makes them non-conforming loans.
Jumbo loans generally have a slightly higher interest rate. Jumbo loans are riskier for lenders as they involve more money. All non-conforming loans, including jumbo loans, have guidelines set by the lending institution that is underwriting the loan.
The FHA does not lend money; it just backs qualified lenders in case of mortgage default.
Visit HUD.gov for more info on FHA loans: https://www.hud.gov/program_offices/housing/fhahistory.
If you are light on capital or have a lower credit score, an FHA loan might be a good fit for you. FHA loans can also benefit an individual who has had a recent derogatory credit event such as foreclosure, bankruptcy, or a short sale. As long as you have re-established credit, an FHA loan requires shorter waiting periods compared to conventional loans for borrowers with a recent derogatory credit event. If the borrower needs assistance in qualifying, FHA loans let relatives sign as non-occupant co-borrowers as well.
VA loans are mortgage loans that are insured by the U.S. Department of Veterans Affairs or VA. It’s important to distinguish that the VA does not lend money. The VA guarantees the loan when it is closed, protecting the lender if the borrower fails to repay the loan lenders. Both the borrowers and the lenders must meet qualifications to be eligible for a VA loan.
The United States Department of Agriculture (USDA) issues USDA rural development home loans. A home loan, which can provide 100% funding for eligible rural and suburban homes. These loans are limited to specific regions and zip codes and have household income restrictions.
Loan limits restrict the maximum amount of money a homebuyer can borrow to purchase or refinance a home. As we mentioned earlier, GSEs create and issue guidelines to protect both borrowers and lenders. These guidelines protect borrowers from taking on more debt than they can handle. This, of course, covers the lenders and gives them a better chance of avoiding a borrower defaulting on their mortgage.
Every type of mortgage has guidelines set by the GSEs. Loan limits, borrower credit scores required, and types of financed property are all specifications detailed in GSE guidelines. An example of this is the different loan limits put in place for FHA loans.
Conforming loan limits, or the loan limits on conforming loans, only allow a certain amount of money to be lent to a borrower from a lender. This, therefore, limits the maximum loan amount that will be sold to GSEs like Fannie and Freddie.
Understandably then, the max loan amount insured by the FHA, or the Federal Housing Administration, is set by the FHA loan limits.
Conforming loan limits change from area to area and from year to year. This year, in 2020, and in most of the mainland U.S., single-family homes have a conforming loan limit of $331,760. The conforming loan limit rises this year to $765,600 for single-family homes in areas that have typically higher costs such as Alaska or Hawaii.
The main difference between a fixed rate and an adjustable-rate mortgage (ARM) is how their interest rates work. A fixed interest rate is set the moment you take out the loan, and it will not change.
An adjustable-rate mortgage’s interest rate is, unsurprisingly, adjustable. Adjustable-rate mortgages generally begin at interest rates that are lower than fixed-rate mortgages. This makes adjustable-rate mortgages more attractive because they will stay at low-interest rates for some time, but eventually, that rate will go up.
Fixed-rate mortgages have many benefits. Many borrowers who want to plan far into the future are much happier with fixed-rate mortgages because they are sure they know what their rate will be years in advance. This is because, with fixed-rate mortgages, the interest rates stay the same, and therefore so do the payments. This is very nice because even if the economy on the whole fluctuates, your mortgage stays the same if it’s on a fixed rate.
Fixed-rate mortgages are outstanding for first time home buyers. With a fixed-rate mortgage, the bank takes that risk. If rates rise, the bank will still be loaning the borrower money at a below-market rate because the borrower has a fixed-rate mortgage. If rates fall in the future, the borrower can refinance and secure that lower rate.
As a borrower, you can potentially secure a lower monthly payment with an adjustable-rate mortgage. Also, with an ARM, you’re taking the risk that interest rates could rise in the future. This is beneficial to the borrower who intends to move in a few years. This is why the banks offer lower initial rates.
ARM mortgages are for borrowers who want to save money upfront and are aware of future worst-case scenarios to prepare for payment adjustments. The risk with adjustable-rate mortgages is that borrowers assume that they will be in a better position in the future to absorb payment increases. When considering an arm, you must weigh all the possible scenarios and determine that an adjustable-rate mortgage is a right move for you.
Yes, you have a multitude of loan options to choose from when considering refinancing, but it’s crucial to weigh all of your options. Take your time figuring out whether refinancing your home mortgage is in your best interest at this point. Factors such as how much longer you plan to stay in your home, your financial goals, and your credit profile all will help ultimately determine your decision of whether or not to refinance and when.
If you are planning on refinancing, be sure you have a goal in mind. Be clear about the reason for your decision, because the truth is, refinancing your home loan is not a small or straightforward undertaking.
Ultimately, the best plan of attack when considering refinancing is to compare all of your options and understand why it’s advantageous. You might consider refinancing because you want to save money, skip a mortgage payment, or to get a lower rate on your mortgage. There are many avenues and roads to the same destination when talking about financial goals, so weigh all of your options. To help with your decision, look over these reasons for getting a refinance on your mortgage:
A general question from prospective refinancers is whether or not they have a credit score that is high enough to refinance. You’ll want to start by checking your credit report. If you don’t have any late or missed payments on that credit report, you are in good shape. Late or missed payments on your mortgage will hurt you, so make sure you don’t have any of that going on either. Start building a positive and healthy habit of making your mortgage payments on time and paying your other bills on time as well. This will always raise your credit score and increase the likelihood that you’ll be able to refinance.
Surprisingly, it could cost you more money if you refinance to secure a lower interest rate. The reason behind this is that your loan term might increase with the lowered interest rate. Instead of jumping at the lowest rate, you’ll want to break down the cost and compare it against the benefits. This way, you’ll be sure that you’re making the smartest financial decision.
Refinancing can get you a lower monthly payment, no doubt. Lowering your interest rate or converting to a longer-term has the potential to reduce your monthly mortgage bill payment by hundreds of dollars. This can be good for you if you’ve suffered a loss in income.
Switching to an adjustable-rate mortgage (ARM) may lower your monthly payment. Be aware that interest rates on these loans change over time. Only refinance into an ARM if you’re willing and able to take the risk of higher monthly payments later on in the future.
The equity of your home is simply the percentage of your home that you own. The more money you pay towards your home, the more of it you truly own. This is one way you increase your home equity. Another way your equity can rise is if the value of your home goes up. Having a mortgage means you have purchased a home, but your home equity will tell you how much of the place you actually, truly own.
When you have a tremendous amount of equity, you’ll see that the amount you still owe on your home loan is less than the value of your home. This situation is called having a low loan to value (LTV) ratio. When you have a lower LTV ratio, your risk associated with your loan is lower. Something nice about having an excellent LTV ratio is it can help you avoid needing insurance. If your LTV is 80% or less, you don’t need to get private mortgage insurance or PMI.
A cash-out refinance is when you have higher equity with a lower LTV. This allows you to refinance for more than your current mortgage.
When you’re getting a conventional mortgage, and you’re putting down less than 20%, as is the nature of a conventional loan, you’ll have to get private mortgage insurance or PMI. Mortgage insurance is your saving grace when you can’t afford to put down 20% of your home loan. A lender is protected by mortgage insurance if you default on your loan. You have to get mortgage insurance no matter how much money you put down when you’re getting an FHA or USDA loan. Interestingly, with VA loans, you don’t get mortgage insurance, but instead, you pay what’s called a funding fee.
Mortgage insurance saves you for a while if you begin to miss payments on your loan. The money you’ve paid towards insurance will effectively satisfy your lender’s need for debt payment for a short amount of time. Be sure that you understand mortgage insurance does not protect you from having your home go into foreclosure. You have to find a way to get back on track and start making your mortgage payments again before the grace period initiated by your mortgage insurance is over.
Can you avoid mortgage insurance? Essentially, paying 20% down or more on a conventional mortgage is the only way to avoid paying for mortgage insurance or funding fees. If you’re putting down less than 20% with a conventional loan, you need mortgage insurance. If you’re getting an FHA or USDA loan, you need to get mortgage insurance no matter what. Mortgage insurance is not required for VA loans, but a funding fee is required unless you are eligible to be exempt from this fee.
The big draw of a conventional mortgage is the low down payment options. Borrowers can pay as little as 3% down with a conventional mortgage. You are going to have to pay for private mortgage insurance or PMI. You can avoid this by making a down payment of 20% or more. You will then not be required to pay for private mortgage insurance if you do this.
Mortgage protection insurance protects you, the borrower. Private mortgage insurance protects the lender. PMI will protect the lender if you default on your mortgage. In many cases, having PMI is not optional. Having mortgage protection insurance is, in many cases, optional, although it might be wise to consider still having. Mortgage protection insurance will pay your monthly mortgage payments for a while if you become unemployed, become disabled, or die.
With all FHA loans, you have to pay for mortgage insurance premium or MIP. You’ll pay a 1.75% premium upfront. You also have to pay for an annual premium. Your annual premium can be anywhere from .45%-1.05% of the average balance remaining for that year. If you put down less than 10%, you’ll pay for mortgage insurance premium for the entire time span of your FHA loan. You’ll only have to pay your MIP for 11 years; however, if you can put down any more than 10% initially on your FHA loan.
The U.S. has loans available for military service members, some members of the National Guard, and some spouses who survive their past serving loved ones. These loans are called VA loans. They are funded by Veteran Affairs. These loans have low-interest rates. They also have options for no down payment at all. You don’t need to purchase mortgage insurance, but you’ll most likely have to pay a funding fee if you don’t. This funding fee depends on whether or not you’ve got a VA loan before. Also, your status in the service can affect whether or not you are required to pay the funding fee. Sustaining certain injuries during your service and incurring disabilities from this can also determine if you have to pay the funding fee. The funding fee is anywhere from 2.3%-3.6% as of 2020.
USDA loans do require you to have mortgage insurance. You’ll pay for this in a combination of two ways. There is a one time upfront guarantee fee you have to pay. In 2020, this upfront guarantee fee is 1%. Then there is an additional annual fee that is divided up into your mortgage payment every month. In 2020, this annual fee is .35%. This annual fee lasts the entire duration of the USDA loan life. These percentages can change year to year, but once you close your USDA loan, it will not change because of any yearly percentage rate fluctuation.
You’re going to be paying your mortgage every month so you might as well know ‘what’s in there. There are essentially four parts that make up your monthly mortgage payment: principal, interest, taxes, and insurance.
A loan’s principal balance is the original loan amount minus payments that have been made against the balance. The principal is just the amount that’s left to pay back.
Your mortgage interest is the percentage of the total cost of your mortgage that you’ll pay in addition to the full loan amount.
It’s common to find that the property tax will also be added to your monthly mortgage payment. Your lender will just hold onto this money in an escrow account. When the property tax on your mortgage is actually due that year, that’s when your lender will take that money out of the escrow account and use it to pay the property tax.
There are two types of insurance you need to know about when dealing with mortgages. There is mortgage protection insurance, and then there is private mortgage insurance (PMI). Mortgage protection insurance will protect you and pay your monthly mortgage payments for a while if you are unable to because of unemployment, becoming disabled, or sudden death. Private mortgage insurance, on the other hand, is for the benefit of the lender. PMI will protect the lender if you default on your mortgage. With most mortgages, PMI is not optional.
Your monthly payment will fluctuate based on how much money you put down and your home loan amount and the other factors mentioned above. If you want to break down how much your monthly payment could be, use our mortgage calculator.
APR means annual percentage rate. This is your yearly interest rate.
It’s important not to confuse APR with your mortgage interest rate. Your mortgage interest rate is simply the percentage you pay of your entire home loan. APR is your yearly interest rate.
It’s kind of funny to say, but getting a mortgage will cost you. Closing costs are the fees you pay for closing a mortgage. Everyone’s got to get paid. Before that sweet moment of finally closing your mortgage, you’ll sign all of your mortgage documents and finalize the papers that make you the effective owner of your new home. Every step of the way to this moment, many people were helping move the process along. Your closing costs are what you owe all of these people for their services. You cannot close your loan without paying your closing costs.
Your closing costs will be 2%-5% of your home purchase price, with varying factors impacting that percentage. Some of these variables include the state you close in, the type of loan you receive, and even your lender. You will get an itemized list of specific closing fees on your loan estimate and closing disclosure.
If you were beginning to worry that the closing costs are stacking up against you, you’re not alone. Utilizing the following suggestions can help make closing easier by minimizing fees. First, know your options and know that you can choose which vendors and agents will help you close your home. Next, try to reduce the number of prorated days between shutting your loan and paying your mortgage. You may also ask the seller of the home if they are willing to cover some of the closing costs for you, as many sellers are eager to close. Lastly, review your final closing documents to ensure fees are correct and fair. The guide below explains the costs you may see on your closing disclosure.
All of the closing costs will be itemized on your loan estimate and closing disclosure. Here are the standard fees you can expect to see:
Mortgage application process fee from your lender.
Preparation and reviewing of your home purchase agreements and contracts by your real estate attorney*.
Fee for the handling of your closing by the title company, the escrow company or attorney*.
Added for signing physical documents, paying a courier fee will expedite the transportation of these documents, and this fee can be avoided by signing digitally.
$24-$35 for lenders to pull your credit report from all three of the primary credit reporting bureaus, you’ll find that some lenders won’t charge a credit report fee because they are given a monetary discount from those three credit reporters.
Sum cost of two months property tax plus your closing mortgage insurance payments**.
75% of the base loan amount paid at closing plus 45%-.85% annual mortgage insurance premium payment paid monthly (percentage determined by the term length of your loan and the mortgage base amount.)
A fee you pay to a flood inspector who certified to tell you if your new property is in a flood zone. Note: If the home is located in a flood zone, you must add flood insurance to your home, and pay for observation of your property’s flood status.
Cost of the documents to transfer ownership for a home that has a homeowner’s association (HOA), sometimes paid by the buyer. Note: Be sure to get documentation from the seller of the home, showing precisely what HOA due amounts are and get a copy of the HOA’s financial statements, minutes, and notices. You must also see the bylaws, conditions, covenants, and restrictions and rules of the HOA before the purchase of the home.
Prepayment of your first year’s homeowner’s insurance premium**.
A one time and upfront cost that you paid to the title company. Note: this title company protects your lender if there ends up being an ownership dispute or if a lien arises that it at first did not find in the initial title search.
Paid to the inspector who is certified to determine if the property has hazardous or lead-based paint.
The upfront cost paid to the lender that reduces the interest rate on your loan. Note: every one point you pay equals 1% of your loan amount.
Your owner’s title insurance is a protection policy. If somebody ends up challenging you and your ownership of the home you purchased, your owner’s title insurance will protect you. This fee is optional, but you’d be wise to pay for it- at least most lawyers say so.
Many lenders won’t charge an origination fee. Instead, they will just charge you with a higher interest rate to cover origination costs. If your lender does charge you an origination fee, it’ll generally be 1% of your loan amount.
You’ll want and sometimes need to have a pest inspection done for many reasons. You don’t want to buy a home with termites, for example. That would not be good for obvious reasons. Your pest inspection will also look for dry rot and other pest related damages. Many states and some loan types require a pest inspection. There will be a fee that you’ll have to pay for this inspection, whether it’s optional or required.
You’ll make a payment for prepaid daily interest charges. Prepaid daily interest charges account for all of the days in between the day you closed your mortgage and the first day you pay your mortgage.
Private Mortgage Insurance or PMI is an insurance cost you might have to pay depending on your loan type and down payment amount.
Your property appraisal fee is simply the fee that you pay to a professional appraiser to have your home’s fair market value assessed. Your fair market value will tell you what your loan to value (LTV) ratio is.
Your property tax is a fee you’ll pay at your closing. You’ll have to pay any property taxes that are due within a time frame of 60 days from your closing date.
A fee paid to lock in your interest rate during the time between your pre-approval and your actual loan closing.
Fee for having your public land records recorded paid to the local recording office.
You’ll need to officially confirm your new property boundaries when you buy a home. This survey fee will be paid to the surveying professionals who will do this for you.
This service will communicate with your lender that you are paying your property tax payments on time, and your lender will be notified if the payments have not been made.
Paid to the title company to research and report on public property records to be sure that there will be no ownership disputes or liens with your new property.
Paid to transfer the title of your new home to you from the seller.
Paid to the underwriter. Note: when you’re going through the loan process with your lender and mortgage consultant, they’ll need to verify your income, your employment, and your credit to be able to close the loan with you. This job is done by your lender’s team of underwriters. An underwriter will research, assess, and verify all of your financial information and communicate this with your mortgage consultant.
With VA loans, there’s a funding fee. This exists to ensure that the VA program can continue to run smoothly for future loans. Dependent on your history of service and the type of property ‘you’re purchasing, this funding fee can range anywhere from .5% to 3.6% of the full loan amount. If it is your first time using the program, it will be 2.3%. Some eligible VA borrowers will be exempt from paying this funding fee. Surviving spouses who are not remarried can be exempt from paying a VA funding fee. Some disabled veterans are also exempt. Contact your mortgage consultant or the VA to find out if ‘you’re exempt from paying this fee.
5%-6% of the total home purchase price paid by the seller and split by the buyer’s agent and the seller’s agent.
*Varies by state
**Varies by lender
Would you rather pay off your new iPhone over the course of 12 months or 24 months? In the end, you’re paying relatively the same amount for the same thing; it’s just going to cost you a different amount per month. This is a straightforward analogy for the difference between 15-year and 30-year term fixed-rate home loans.
With a 15-year fixed-rate mortgage, you’ll have the satisfaction of paying off your loan in 50% the time it would take you with a 30-year fixed-rate mortgage. On the other hand, a 30-year mortgage will cost you less month to month. This will put more cash in your pocket every month.
Something to consider is that with the shorter 15-year term versus a 30-year term, you’ll pay less overall interest on your loan. You’ll also be building up your home equity much faster with a 15-year loan. While these are nice things, you may want to consider the consequences strongly. Your mortgage payment month to month will cost a considerable amount more with a 15-year term. If you might not be able to afford this, it may be safer to go with a 30-year fixed-rate mortgage term.
The credit score needed to qualify for a mortgage will depend on what type of loan you are looking into getting.
While many of us use quick apps like Credit Karma to see estimates of our credit scores, lenders go directly to the source to get the most accurate information. Mortgage lenders pull your credit report from all three major credit bureaus: TransUnion, Experian, and Equifax. These official reports give them all the information about your credit that they need to know.
Unfortunately, many of us have bitten off more than we can chew financially with subscription services, mobile phone plans, pay overtime online purchases, and good old credit card debt. Luckily, there are steps moving forward that you can take to improve your credit score.
If you find that you are in credit card debt, you need to make a plan on how to get out. There are a thousand resources on the internet that detail specific strategies of how to get out of credit card debt. One way or another, once you pay off your credit card debt, your credit score will surely rise. If you have any other forms of debt, such as student debt or debt with collections, taking care of these will also raise your credit score. You want to be paying your bills on time whenever they are due. As long as you are on time and not behind on your bills, your credit should be in good shape. Make a habit of pulling your official credit score once a year. In the U.S., every citizen gets a free credit score report. Other than this, you can use services such as Credit Karma to get a ballpark idea of where you’re at with your score.
Your home loan down payment is a life event that will separate your life into two parts. You’ll remember your life before your down payment, and you’ll remember your life after. Coming up with the cash to put down when buying your house can be daunting. But there is life after your down payment- we promise. You will survive it, and with a little courage and a healthy serving of due diligence, you’ll be comfortable making your down payment in no time. So how much cash do you need for your down payment? The answer to this question can be a little complicated and can vary based on your finances and the loan program you choose.
Your mortgage down payment is the percentage of your total loan that you pay at the start of your loan term. In most cases, you’ll pay a portion of your down payment at the beginning of the loan process in the form of earnest money. You will then pay the remainder of your down payment on the day of your official loan closing. There are some home loan mortgage programs that will let you put down no down payment at all, while other loan programs require you to put down 20% of your entire loan to qualify.
If you are financially able to make a down payment of 20%, you will be in good shape. The obvious benefit of this is that exactly one-fifth of your entire mortgage will already be paid off. This means you will have more equity in your home at the very start than you would with a lower down payment. This is absolutely nothing to sneeze at and should be seen as a significant accomplishment. Another benefit is that you’ll probably earn a better interest rate by doing this. Your upfront costs will lessen, and so will your ongoing costs. On top of all of this, you’ll likely enjoy a lower monthly mortgage payment when you put 20% down on your mortgage.
Yes! You absolutely can get a mortgage with a down payment of less than 20%. Some borrowers who are qualified can get a mortgage with a down payment of only 3%. This would be done with a conventional loan.
Another option is to look at FHA loans. Thanks to the Federal Housing Administration, borrowers can put down only 3.5% with an FHA loan.
There are also unique options for U.S. veterans and borrowers in rural areas. VA loans are available from the Department of Veterans Affairs and are eligible for U.S. service members who are active or retired. USDA loans are for those living in rural areas. Both of these loan options offer much more flexible down payment options than seen in other loan types.
By now, you’re probably feeling like a mortgage pro. Head over to our home loans section to start shopping for your mortgage. Your dream house is not far out of reach and On Q Financial is here to help make your dream home a reality.
The following loan scenario is only an example. Actual amounts, fees, and rates vary depending on each individual borrower’s situation and additional factors. Loan example is based on a loan amount of $500,000, 30-year fixed conventional mortgage loan with a 3% down payment of $15,000 and estimated closing costs of $3880. Interest rate of 4.375%, APT of 5.437% and an estimated monthly payment of $2,975.96. All amounts shown are estimates provided for educational and comparison purposes only and will vary for each loan. Rates and fees are subject to change at any time. This is not a commitment to lend or extend credit. Loan approval is subject to applicant’s qualifications for a loan program. Information is subject to change without notice. The material provided is for informational and educational use only.
The information is considered accurate and reliable at the time of being published. Please contact your On Q financial, Inc. Mortgage Consultant for more information. On Q Financial, Incl is an Equal Housing Lender. NMLS 5645
Approval Code OnQ0319200681Y000008SXmQ