May 4, 2017.
One of the worst things you can do when you’re buying a house is to go into your mortgage blind. Buying a house is probably going to be the biggest financial decision you make. Asking the tough questions – and even the easy questions that seem obvious – is what’s going to help you make a smart investment.
Questions are your number one comparison tool. You can quickly suss out a lender, or a loan product, based solely on what you ask and the answers you get back. If you don’t ask, according to Freddie Mac, you could be leaving money on the table. Almost half of all homebuyers don’t shop around before they take out a mortgage. But comparison shopping and asking questions of one to five lenders could save you anywhere from $1,500 to $3,000.
It’s important to note that a lender with great rates, great loan programs, and great service can further reduce the amount of money you leave on the table. A lender with a 10-day close loan program, for example, might save you a month’s worth of living expenses by getting you home four weeks faster than the industry average.
Today, homebuyers are making stronger, more informed choices, likely to avoid another housing market crisis. As Jude Landis, Fannie Mae Vice President of Single-Family Risk Management, recently explained:
“In 2008, the mortgage and housing market experienced a disaster. In 2018, market players, including borrowers, are behaving in ways that are rational and in keeping with understandable cycles. In 2018, they also rely on more verified, accurate data than ever before.”
Our top 15 mortgage FAQs can prep you to make your smartest pick
Getting your questions answered from a knowledgeable lender can make you a more confident and capable buyer:
1. How can I find out how much home I qualify for?
- You can use our online prequalification process to work with a loan officer and find out approximately how much you can borrow before you start shopping for a house.
- Once you have that number, you can provide more information and allow your loan officer to run your credit report to verify your assets and income.
- Your loan officer can also help you obtain a complete written credit approval, subject to an appraisal, before you make an offer on a house.
There’s a difference between being preapproved and prequalified. When you’re prequalified, you’ve given your mortgage lender all the basic information they need to help you determine what loan program and what amount you may prequalify for. When you’re preapproved, your mortgage lender will have collected the necessary documents and verified your information to move the loan forward to underwriting and approval.
Prequalification can be done easily, quickly, and online. To take the next step and to get preapproved, you may be asked for:
- Tax returns and W-2 forms from the most recent 2 years.
- Bank/asset statements from the most recent 2 months.
- Paystubs from the last 30 days.
- Valid photo ID.
But remember, by furnishing any and/or all of this documentation, you are in no way obligated to accept the terms and conditions of the mortgage offered, nor do you have to provide these documents to receive a Loan Estimate (LE).
2. Is there anything I shouldn’t do before I get prequalified?*
- Don’t start shopping for a new home until you’ve been prequalified.
- Don’t pack or ship any important documents, such as tax returns, bank statements, pay stubs, and W-2s.
Buying a house doesn’t have to be hard. Keeping all copies of your paystubs, bank statements, tax returns, and W-2s can make a speedy prequalification even speedier. To further grease the wheels and keep your home loan process running smoothly, take care to make all your bill payments on time. It also helps to keep a paper trail of any large deposits you make, as well as notify your loan officer directly if you plan to use a down payment gift from your family.
Prequalifying for your home loan before you begin shopping for a house can save you hours of unneeded stress and heartache. When you know how much house you can afford in advance, you can meet with your realtor, well-informed and ready to make an educated buy. In eyes of a seller, a prequalified homebuyer also appears more motivated.
*Avoiding these actions before and during the financing process can prevent any unnecessary confusion.
3. Is there anything I shouldn’t do while I’m getting prequalified?*
- Don’t suddenly pay off all your debts.
- Don’t apply for new credit cards.
Prequalification can be easy, but it’s after you get preapproved and the loan process progresses that your lender is required to pull a refreshed credit report before closing to check for any new debt. So, any major changes in your finances could delay your loan closing – or even result in a denial despite an earlier approval.
How can you keep your credit clear while your new home loan is in the works? Don’t do this:
- Apply for a new credit card, auto loan, or other types of credit.
- Co-sign a loan with someone.
- Change jobs, become self-employed, or quit your job.
- Skip payments on existing credit accounts, utility bills, or loans.
- Charge up your existing credit on big-ticket items, like furnishings for a new house.
If you think any of these don’ts are musts, talk to your lender before you take action. Your loan officer can help you figure out what to do so that your mortgage loan is the least negatively affected.
*Avoiding these actions before and during the financing process can prevent any unnecessary confusion.
4. What are income and debt ratios?
- Income ratio: Your total monthly housing expense divided by your pre-tax monthly income.
- Debt ratio: Your total monthly housing expense plus any recurring debts, i.e., car payments, monthly minimum credit card payments, and other loan payments, divided by your monthly income.
- Standard loan underwriting guidelines suggest a max 28 percent income ratio and 36 percent debt ratio, which may vary based on personal finances, loan program, and down payment.
While not taking on any debt and paying for everything with cash seems like a logical choice if you feel you can’t afford your lifestyle, no credit also means bad credit in the eyes of a lender. There’s bound to be a time when you can’t buy something with cash, like buying a house (in most cases). So, we recommend opening at least three credit card accounts and making occasional purchases with each card.
To manage your debt and maintain healthy credit, keep credit card balances to less than 30 percent of your credit limit. Also, don’t close long-term credit lines, even if they’re not being used. Your longest standing credit card account might be a huge contributor to your credit score health — and the mortgage rate you qualify for.
5. What are cash reserves?
- Cash reserves: The extra funds available to you after your loan closes.
- These funds reflect your ability to make monthly mortgage payments, and different loan programs may have different cash reserve requirements.
To estimate your ability to pay your monthly mortgage, we recommend setting aside about 28 percent of your monthly income. This number factors into your debt-to-income ratio, mentioned above. For many people, any number between 25 percent and 32 percent of your income is manageable. But, keep in mind that relying on a higher percentage of your monthly income could put you at risk if you have a big financial change, like rising insurance costs or loss of employment.
6. What is mortgage insurance?
- This insurance helps protect the lender if a borrower forecloses on their property.
- Borrowers pay for the mortgage insurance, allowing lenders to grant loans they might not have otherwise.
- Mortgage insurance may be required on some loans when a down payment is less than 20 percent.
Mortgage interest, insurance paid, and property taxes are normally tax-deductible for your principal residence. As confirmed by TurboTax for the most recent tax year, buying a house is a big investment, but the tax deductions on the purchase may be large enough to lower your tax bill “substantially.” Interest/insurance payments on a residential mortgage (as well as mortgage interest/insurance on a second home) may be fully deductible, in most cases.
Likewise, selling one home and buying another means you might be able to protect the profits on the sale of your home, as long as it was used as a principal residence for any two of the last five years. You could protect up to $500,000 in tax‐free profit when filing federal taxes jointly or $250,000 when filing single. This added bonus of tax‐sheltering the profits on the sale of your home may be available to you once every two years. It’s important that homeowners take advantage of these deductions because they could help save hundreds of dollars in annual taxes.
7. What are mortgage points?
- Also called discount points, mortgage points work as a one-time fee you can opt to pay if you’d like to get a lower interest rate.
- One mortgage point equals one percent of your total loan amount and may drop your interest rate one-eighth to one-quarter percent lower.
You may have noticed by now that lenders charge their own fees, which can vary greatly. One lender may choose to waive a fee but add on another. Another lender might quote an interest rate before adding or subtracting discount loan points that can change the total cost of a mortgage loan.
You can determine if you’re getting a good deal on a loan by comparing the cost of some of the most common lender fees:
- Credit report
- Discount points
- Document prep
- Loan origination
- Tax service
- Title search
These loan fees may seem like small potatoes compared to the ever-important interest rate, but they’re a great indicator for finding a good mortgage loan from a fair lender. Lenders are also required to provide a free written fee estimate for any of the costs listed above.
8. What’s an APR?
- Annual Percentage Rate: The cost of your total loan credit calculated into an annual interest rate, also called APR.
- The APR includes loan points and other prepaid finance charges to reflect the true yield on the loan, which is why the APR is normally higher than a loan interest rate.
- To check that you’re getting the most competitive loan, you can compare “apples to apples,” or APR to APR, on different loan programs.
After you’ve applied for a home loan, you can expect to receive a Loan Estimate (mentioned above) from your lender. If you applied for more than one type of loan, an LE will be broken down for each loan type. The APR for a loan will be listed on page 3 of the LE, in the comparison section.
Most of the time, you’ll notice the difference between your APR and your loan interest rate right away. An APR is often higher than an interest rate because of added fees. An APR is essentially a comparison tool. Interest rates, loan fees, and points may be all over the map, but the APR can always be used to accurately compare multiple loan products. And in cases where an interest rate looks a little too attractive, the APR can tell you the real story.
You can use this handy trick to separate the good from the bad when choosing a mortgage: Compare a loan’s APR to its advertised interest rate. An APR that’s noticeably higher than the interest rate may be a red flag that added costs are attached to the loan. Your loan officer can also help you compare and better understand loan fees.
9. Can I still get a mortgage if I have bad credit or have filed bankruptcy?
- Having good credit helps to get a more competitive mortgage interest rate, but perfect credit isn’t required.
- If you have a low credit score or have filed bankruptcy in the past, you can work toward improving your credit.
When in doubt, contact your loan officer. At Cornerstone, we’ll do whatever we can to help you buy a home, even with spotty credit.
Don’t let something as intimidating as a credit score keep you away from the information you’re entitled to. Checking your free credit report yearly, available from one of the three nationwide credit reporting agencies, can help you to keep tabs on your financial status — which becomes especially important when you’re buying a house. Yearly credit checks can also help you catch any problems that pop up early on, like mistakes on your credit report or instances of fraud (potentially related to the 2017 Equifax breach).
Once you get your annual report back, here’s how to understand your FICO score, ranging from 300 on the low end to 850 on the high end. There are five factors that make up your credit rating:
- Types of credit: Taking out a variety of credit lines, like credit cards, a car loan, and other credit accounts, could increase your score. FICO score impact: 10 percent.
- New credit accounts: On the other hand, having a lot of credit inquiries could lower your credit score — with the exception of home and auto loan inquiries that may be lumped together as one inquiry within a 30-day period. FICO score impact: 10 percent.
- Length of credit history: It’s not necessarily bad to have a short credit history, if you’ve been handling your money well. And having one or two good credit accounts is better than having no credit at all. FICO score impact: 15 percent.
- Payment history: Delinquent and overdue bills can lower your credit score. FICO score impact: 35 percent.
- Outstanding balances: Keeping the amount you owe to creditors to under 30 percent of your credit limits shouldn’t affect your credit score. FICO score impact: 30 percent.
This bears repeating — your credit score matters when you’re trying to buy a house. Your credit score has a direct impact on your mortgage interest rate. A great credit score with a rating higher than 740 could qualify you for the lowest available interest rates, compared to a credit score under 620 that might make it harder to get a loan. Talking to your mortgage lender about how you can fix some blemishes in your credit score is well worth the time and effort to get a lower interest rate. Lowering even one percentage point on a mortgage could save you thousands over the life of your loan.
10. I just got a new job. How does this impact getting a mortgage?
- Most loan programs are looking for a two-year job history in the same field — though changing jobs to move to a better position could be seen as favorable.
- For recent college grads, you may still be able to get a home loan without a two-year work history.
If you’ve recently transitioned from conventionally employed to self-employed, you may need five more documents to complete your mortgage approval:
- 1099 for the last two years.
- Form 1120S or K1.
- Both personal and business full tax returns for the last two years.
- Proof of self-employment.
- Current balance sheet and profit/loss statement.
If you receive retirement or disability income, you may need five additional documents for home loan approval:
- Pension award letter.
- Social Security award letter.
- Supplemental Security Income (SSI) benefits.
- Permanent disability award letter.
- Recent retirement account statement.
11. Can I “lock in” my interest rate?
- Yes! Get in touch with your loan officer, and they can lock in the interest rate you were quoted.
- You’ll be provided with a written Rate and Price Determination Agreement, detailing interest rate, loan terms, and time period for the rate lock.
- You could use a rate shield to lock your rate for up to 270 days, with the option to float down to a lower rate if rates drop within 45 days of closing.**
When mortgage-backed securities (MBS) rise, interest rates drop. Industry experts have considered MBS safer investment options for global investors. That’s why interest rates have hit record lows in recent years, compared to the highs of more than 18 percent in the 1980s. Signs of economic improvement will cause MBS to sell and interest rates to rise.
You can use a handy app to get prequalified for a mortgage and get a rate quote based on your individual financing needs and specific loan requirements. This interest rate quote is customized. So, it’s tailored to your individual profile and financial situation. The rates reported in the media are source material. Oftentimes, those rates may be expired by the time you read about them.
Once you’re prequalified and receive your rate quote, make sure you get a full, written term sheet that shows the interest rate, loan term, total monthly payment (including insurance and taxes), total cash-to-close, and line item list of closing costs before you lock your rate with a lender.
12. What’s prepaid interest?
- Just like it sounds, prepaid interest on a mortgage is paid in advance.
- For most mortgages paid on the first of the month, you’re paying for interest accrued the previous month.
- Depending on when you close, you may pay prepaid interest that has accrued for the days left in the month — the interest accumulated from May 15 to May 31, for example.
In some cases, your lender may recommend a no-cost home loan to keep upfront costs as low as possible. As a borrower, you won’t have to pay any loan points, closing costs, or fees for credit reports, appraisals, and other lender charges normally lumped in at closing. This may look like opting to add your closing costs on to the total amount of the loan.
Or, you may opt to increase the interest rate on your loan by three-eighths to seven-eighths of a percentage point, depending on the loan amount. If you have a larger loan, you’ll see a smaller increase. For example, instead of paying a 4.5 percent interest rate and $2,500 in closing costs, you’ll pay nothing at closing with an increase to a 5 percent interest rate.
When asking about interest, take a moment to talk to your lender about other out-of-pocket expenses, like down payment, closing costs, and loan-related fees. Other expenses that come with buying a house may include: taxes, homeowners’ association dues, utilities, homeowner’s insurance, and any home improvements you intend to make.
13. What are closing costs?
- The extra costs paid at closing may include attorney fees, prepaid interest, insurance fees, documentation fees, and more.
- Closing costs may vary by borrower based on your mortgage loan type, property location, and other factors.
- You can find your closing costs broken down in your Closing Disclosure, provided by your loan officer at least three business days before your expected closing date.
Closing costs may range from 2 to 5 percent of your purchase price. The buyer and the seller are both responsible for paying different costs at closing.
Closing costs paid by buyer:
- Half of title and escrow fees — such as title insurance, transfer taxes, notary fees, and more.
- Lender fees — to cover the act of obtaining a mortgage, including the appraisal.
- Homeowners insurance — normally, the first year of hazard or homeowners insurance is paid upfront on closing day.
- Additional costs paid by the buyer may include the owner’s title insurance, inspection fees, earnest money, RE Brokerage admin fees (if applicable), and credit report fees.
Closing costs paid by seller:
- Half of title and escrow fees — such as title insurance, transfer taxes, notary fees, and more.
- Commissions — estimated at around 5 to 6 percent for the average real estate commission.
- Loan payoff — to cover any outstanding mortgage balances.
- Additional costs paid by the seller may include optional home warranty, prorated property taxes, RE Brokerage admin fees, pest or septic inspection, and prorated HOA fees, if required.
Buyers, you can also ask a seller for closing cost assistance as part of your offer on a house. Additionally, it helps to do your homework before closing day so that you don’t sit down at the table unprepared. Review your Closing Disclosure, which you should receive three days before closing. Check over the charges, compare to your Loan Estimate, and clear up any inconsistencies or questions with your lender.
14. What should I bring to closing?
- At closing, which normally takes place at the title company, you and any other borrower listed on your mortgage agreement will need to bring in a valid driver’s license.
- Any funds needed at closing must be brought as a wire transfer or cashier’s check made out to the title company.
Closing is the final step in the homebuying process. A closing might also be called a settlement, where you and any other parties sign all necessary documents to complete your mortgage transaction. Sign these documents, and you take ownership of your home loan. You’ll then be the proud owner of a new house.
Leading up to closing, consider using an app to make things easy. Our free LoanFly app has an exclusive and secure Borrower Portal that you can use to upload documents and track your loan’s status. That’s less paperwork to worry about on closing day.
15. When will I get my money?
- You’ll have access to your funds on the day you close on your loan — when you’ve officially bought a house.
Congratulations on closing: This is a big deal. And remember, moving to a new home because of a job transfer or change could qualify you for a moving expense deduction, in many cases. To get the break, the distance between your old home and new job must be at least 50 miles more than the distance between your old home and your old job. If you qualify, you’ll get to deduct the cost of moving your belongings and the expense of moving you and your family, including lodging but not meals.
You have your mortgage questions answered. What’s next?
Now’s when things start moving. Contact a local loan officer, and we’ll tell you how much house you can afford and how fast you can get there. You could be home in 10 days.***
**Upfront fee required based on length of extended rate lock term.
***10-day close not typical. Not all loans will close in this timeframe.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.