Obtaining a mortgage is a complex process that can be challenging for even the most sophisticated buyer.
Here are some answers to mortgage questions that buyers ask us.
A residential mortgage is a long-term loan (usually 15 or 30 years in length) provided by a bank, credit union, or other financial institution secured by the property the buyer is purchasing. If the buyer defaults (fails to make payments in a timely fashion), the lender may start foreclosure proceedings to force payment of the debt through the sale of the property.
What are the most common types of mortgages?
There are wide variety of loans available to borrowers. Here’s a list you can share with your buyers:
Government-backed loans
These include Federal Housing Administration (FHA), Veteran’s Affairs loans (VA), and US Department of Agriculture (USDA) loans. Government backed loans offer various types of down payments, interest rates, repayment terms, and eligibility standards.
Fixed-rate mortgages
Fixed-rate purchase mortgages are typically 15 or 30 years in length and the interest rate is locked for the entire term of the loan.
Adjustable-rate mortgages (ARMs):
The rate on ARMs fluctuates based upon changes in the index to which the ARM is based. According to BankRate.com.
ARMs have variable interest rates which float up or down with the fed funds rate. This means if the fed funds rate goes up by a quarter of a percentage point, your ARM rate will increase as well at the next reset. However, there are caps on the amount of interest you’re on the hook for. There are three types of rate caps:
Initial adjustment cap: This is the maximum interest rate on an ARM, if the rate rises, after the fixed-rate period ends. Usually, 5 percentage points is the maximum amount.
Subsequent adjustment cap: This is the maximum rate after the initial adjustment.
Lifetime adjustment cap: This is the maximum interest rate you can be charged over the entire span of the loan.
Home Equity Loans (HELOCs)
A HELOC is a line of credit borrowed against the homeowner’s equity in their home. Their home equity is the difference between the appraised value of their home and their current mortgage balance.
Interest only loans
In an interest only loan, none of the principal is paid down. Consequently, most interest only loans either require a balloon payment where the entire principal must be repaid at the end of the loan, or the loan shifts to being fully amortized after a period of being interest only.
Jumbo loans
According to Bank of America:
A loan is considered jumbo if the amount of the mortgage exceeds loan-servicing limits set by Fannie Mae and Freddie Mac — currently $726,200 for a single-family home in all states (except Hawaii and Alaska and a few federally designated high-cost markets, where the limit is $1,089,300).
Jumbo mortgages are available for primary residences, second or vacation homes and investment properties, and are also available in a variety of terms, including fixed-rate and adjustable-rate loans. A jumbo loan will typically have a higher interest rate, stricter underwriting rules, and require a larger down payment than a standard mortgage.
What are the interest rates for home mortgages?
Interest rates vary due to a wide variety of factors including the type of mortgage, the length (term) of the loan, the borrower’s credit score, as well as market conditions including the indices to which the various types of loans are based.
What are the closing costs and fees associated with getting a mortgage?
Closing costs are the fees and expenses associated with finalizing a mortgage, including loan origination fees, appraisals, fees, title insurance, and escrow fees. They vary based upon the type of loan and the lender. As a rule of thumb, three percent of the loan amount is often a good estimate of the amount of closing costs.
Closing costs are usually in addition to the down payment amount, although in certain situations, they may be rolled into the loan amount.
Unlike rent, the buyer’s mortgage payment is paid at the end of the month rather than at the beginning. (For example, the payment made on July 1st is for the month of June.)
What is the difference between pre-qualification and pre-approval for a mortgage?
According to the CFPB, the pre-qualification letter is:
A document from a lender stating that the lender is tentatively willing to lend the borrower up to a certain amount. This document is based upon a certain assumptions and is not a guaranteed loan offer.
Rather than settling for a pre-qualification letter, buyers should always obtain pre-approval if possible. According to Bank of America:
Preapproval is as close as you can get to confirming your creditworthiness without having a purchase contract in place. You will complete a mortgage application and the lender will verify the information you provide. They’ll also perform a credit check. If you’re preapproved, you’ll receive a preapproval letter, which is an offer (but not a commitment) to lend you a specific amount, good for 90 days.
Pre-approval is a more in-depth process and provides buyers with a substantial advantage, especially if they find themselves in a multiple-offer situation.
What are the documents I need to get a mortgage?
The documents required for completing a mortgage application typically include proof of income (W-2 statements, tax returns, and pay stubs), credit history including current credit card balances and monthly payments, employment verification, recent bank statements, and identification (which typically includes the borrower’s residences for the last 10 years). Additional documents may be required depending on the buyer’s financial situation and the type of mortgage.
How does the mortgage application process work?
The mortgage application process consists of several steps: pre-qualification, pre-approval, loan application submission, underwriting, appraisal, title search, and closing. Each step involves the collection and verification of various documents and information, culminating in the final loan approval and property purchase.
The process can take as little as 30 days (and sometimes less) although 45-60 days is the most common. If there is a problem with the appraisal, a lien on the property, a title problem, or a different issue, loan approval can take much longer.
Ideally, buyers should be pre-approved for a loan prior to writing an offer on any property.
What happens after I get approved for a mortgage?
After being approved for a mortgage, you'll receive a loan commitment letter outlining the terms and conditions of the loan. You'll then proceed to the closing process, which involves signing the loan documents, transferring funds, and ultimately acquiring the property title.