Understanding Mortgage Basics:
The resources below are a great primer to understand more about the components of a loan and the loan approval process. We want to make sure you’re comfortable with your loan and the best way to do that is through Education! Remember, there are more in-depth resources on our Blog page. And we always invite you to reach out via phone or email if you have additional questions.
The three primary things a lender considers when approving a loan are:
- Credit – do you have a history of paying your bills?
- Income – do you earn enough to afford the mortgage payments?
- Assets – do you have enough money for the down payment and closing costs?
Click on the topics below for more information about credit, income, and assets.
Your credit report tells a lender two main things:
- Your credit score
- Your monthly liabilities – the minimum payments that show on the credit report
A 620 credit score is the minimum score for most loan programs. FHA allows loans with a 580 score.
If you don’t have a credit score, you can still get a mortgage. You will need to prove that you have been paying 3 different accounts for the past 12 months. Some examples of acceptable accounts are rent, utility bills, phone bills, car insurance, etc.
Only the debts that are on the credit report are used in determining the amount you qualify for. Some things that do NOT count against you include car insurance, utility bills, phone bills, food, gasoline, entertainment, etc.
The balances of your credit cards, car loans, etc. do NOT matter. Only the monthly payments are considered.
Common mistakes you should avoid
Never assume your score is not high enough. We can tell you exactly what to do to raise your score, and we do it for FREE.
Never assume the score you get yourself is accurate. The credit reports that lenders use are different than the credit reports you can get by yourself, and the scores are often different.
How to raise your credit score – things you SHOULD do
Pay your bills on time.
Every time you pay a bill 30 days late, it lowers your score. The more recent the late payment is, the more that late payment lowers your score.
If you missed a payment, get current on that account. If you are past due on an account, just making the late payment and not making the current month’s payment, will continue to lower your score.
Keep balances low on your credit cards and other revolving credit accounts
- If your balance is more than 70% of your credit limit, it lowers your score the most
- If your balance is 50% – 70% of your credit limit, it lowers your score a bit less
- If your balance is 30% – 50% of your credit limit, it lowers your score even less
- If your balance is below 30% of your credit limit, it will improve your score
Review your credit report with someone who will take the time to go over every line with you. Many credit reports contain multiple errors. We have been teaching classes on credit reports for years, and we are credit experts. We will show you how to interpret everything on the report, how to identify errors, and how to fix those errors. You should NEVER have to pay for this service, regardless of who you choose as your lender
How to raise your credit score – things you should NOT do
Do not apply for new credit. Every time you get new credit, your score goes down until you demonstrate that you intend to pay the bill. Wait until after you close on your new house before buying a car, furniture, carpet, etc.
Important note: When applying for a mortgage or a car loan, you can have your credit pulled numerous times during a 14-day period, and it only counts as one time against your score. (The credit reporting agencies know you will shop around for the best deal, and do not penalize you for it.)
Do not close old accounts. The longer your accounts are open, the higher your score will be.
Do not pay off old collection accounts if the collection company is not currently calling you or writing to you. Paying off an old collection account will turn it into a new collection account, and a new “paid” collection lowers your score more than an old “unpaid” collection.
NEVER pay anyone to “repair” your credit. You can fix errors on your report by yourself – for free. We will show you how and we will help you – for free. There are no “secrets that the insiders don’t want you to know.” Anyone who charges you to “repair” your credit is ripping you off.
The ratio that is used to determine whether you qualify for a loan is called the debt-to-income ratio. It is known as the DTI.
We calculate your DTI by adding up all of your new mortgage expenses – principal, interest, property taxes, homeowner’s insurance, mortgage insurance, and homeowner’s association (HOA) fees. We then add all the monthly expenses that are on your credit report, and divide that total number by your gross monthly income (income before taxes or any other deductions). Example: if your mortgage expenses are $1,000 each month and the total of all the monthly payments that show up on your credit report are $900, then your total expenses are $1,900 a month. If you make $3,800 a month, we divide 1,900 by 3,800 and get your DTI of 50%.
Here are the maximum DTI ratios for different types of loans:
- Conventional loans (non-government loans) = 50%
- FHA loans = 55%
- VA loans = 55%
If two people are applying for a loan, then we use all of their income and all of their expenses to calculate the DTI. We cannot count someone’s income without counting their monthly debt payments.
Lenders are only concerned about your liquid assets, which are assets that you can quickly turn into cash. Some examples of liquid assets are checking accounts, savings accounts, money market accounts, certificates of deposit (CD’s), mutual funds, stocks, bonds, 401(k) accounts, and IRA’s.
Lenders are not concerned about any assets that are not liquid. Some examples of non-liquid assets are cars, household goods, art, antiques, and businesses you may own. Lenders only care about whether you can pay the mortgage they are about to give you. They know you will probably not be able to sell your furniture or your car very quickly if you have to pay the mortgage, so they just don’t care about your net worth.
Lenders care about your liquid assets for two reasons:
- They want to make sure you have enough money for the down payment and the closing costs.
- They want to make sure that if you lose your job, you will have enough money to pay your mortgage until you get another job. This requirement only applies if you are buying a second home or an investment property. If you are buying a house you intend to live in full-time, then you only need enough money to pay for the down payment and the closing costs.
How much money do you need for a down payment? It depends on a number of things, including:
- Type of loan – FHA, VA, USDA, or conventional
- Type of property – condominiums sometimes require more money down
- Type of occupancy – primary residence, second home, or investment property
- Your credit score
Here are the down payment amounts for the different types of loans:
- Conventional (non-government) loans typically require 5% down, although it is possible to get a conventional loan with just 3% down
- FHA loans require 3.5% down
- VA loans require nothing down (100% financing)
- USDA loans require nothing down (100% financing)
Can someone else give you the down payment? Yes! A relative can give you the money for the down payment, as long as they sign a gift letter stating that you do not have to pay them back.
Can the seller, your lender, either one of the real estate agents, or anyone else involved in the transaction give you the down payment? No!
There are many down payment assistance programs available for first-time home buyers, and some of the down payment assistance programs are available to anyone – not just first-time home buyers.
A first-time home buyer is defined as anyone who has not owned a house within the past 3 years. If a couple is buying a house together, then neither one of them can own a house within the past 3 years.
Down payment assistance programs are generally low-interest loans that cover some or all of the down payment and closing costs. Most of the programs cover about 3% – 6% of the sales price.
Most down payment assistance programs have income limitations, meaning you need to make less than a certain amount to qualify for the assistance.
It’s important to remember that these programs are not for every home buyer. The guidelines are very strict for most of them and many people do not qualify. It is always worth pursuing, though.
Down payment assistance programs change all the time, so it is not possible to outline the programs with any accuracy here. We can tell you the current guidelines if you give us a call.
Mortgage insurance is an insurance policy that is required whenever the amount of the loan is greater than 80% of the sales price. You, as the borrower, pay for it. The lender is the beneficiary if you go into foreclosure.
Private mortgage insurance (PMI) is for conventional (non-government) loans. Private insurance companies issue the policies, so it is called private mortgage insurance.
The federal government insures FHA loans, so the mortgage insurance for FHA loans is not called private mortgage insurance, just mortgage insurance.
There is no mortgage insurance required for VA or USDA loans.
The rates for private mortgage insurance (for conventional loans) depend on the borrower’s credit score, the loan amount, the amount of the down payment, the type of loan, and a few other things.
FHA mortgage insurance does NOT depend on the borrower’s credit score.
Whenever you are getting a mortgage, it is always best to see how expensive the mortgage insurance will be for different types of loans because the rates change very frequently.
There are many closing costs involved in getting a mortgage. Some of the fees go to the lender and some go to third parties (appraiser, title company, homeowner’s insurance company, etc.).
Many lenders charge an origination fee (usually 1% of the loan amount), a processing fee, and an underwriting fee. The ONLY lender fee we charge for conventional, FHA, and VA loans is a $500 processing fee (CHFA loans are an exception). Because we only charge a small processing fee, we have some of the lowest closing costs of any lender.
Your lender must give you a Loan Estimate, which lists all of the closing costs, within 3 days of the date you provide them with the following information: your name, monthly income, Social Security number to obtain a credit report, property address, estimated value of the property, and the loan amount. If you do not provide the lender with all of that information, then they cannot give you an official Loan Estimate, although a good lender will be able to give you a very good estimate of what the closing costs will be.
Three days before the closing, you will receive a Closing Disclosure, which lists all of the final fees.
The seller is allowed to pay for your closing costs, but only up to a certain amount. Keep in mind that the amount the seller is allowed to give you may or may not cover all of the closing costs. The maximum allowable amount depends on the type of loan you are getting and the amount of your down payment. If the sales contract (the contract between the buyer and the seller) specifies a certain amount that the seller is willing to pay for the buyer’s closing costs, but that amount is more than the amount allowed by the loan guidelines, then it doesn’t matter what the contract says. Make sure you call us to find out the maximum allowable amount before making an offer on a house.
When the interest rate is locked, it cannot go up and it cannot go down. You will need to lock your interest rate sometime before the closing – usually at least 10 days before the closing. A lender cannot give you a final approval for your loan until the interest rate is locked, so it is a good idea to lock the rate early in the loan process.
Loans are locked for a certain period of time, usually in 15-day increments (15 days, 30 days, 45 days, etc.). You should make sure your rate is locked until the closing. If it is not, the interest rate could change before the closing, or you might have to pay for a rate lock extension.
When you are purchasing a house, you can lock the interest rate as soon as you have a signed sales contract with the seller. If you are refinancing an existing mortgage, you can lock the interest rate as soon as you have completed the loan application.
Some lenders will tell you that the interest rate is locked, when it really isn’t locked. The only way to know for sure is to have your lender give you an interest rate lock disclosure that clearly says the interest rate is locked. If your lender won’t give you a rate lock disclosure, you should find a new lender who will deal with you honestly.
You should NEVER pay a lender to lock the interest rate for you. It does not cost the lender anything to lock the rate and you should not be charged for it.
Interest rates go up and down all the time – sometimes a few times a day. Interest rates change depending on how the mortgage backed securities bond market is trading. If someone tells you they think rates are going to go up or down, do not listen to them. If they knew where rates were going to go, they would not be selling mortgages or writing articles or posting on blogs. They would be trading bonds on Wall Street and making billions of dollars. Anyone who tells you they know where rates are going is not giving you good advice. They are gambling with your money.
You will want to know how much you can afford before you start shopping for a house. This is known as getting pre-approved for a mortgage.
The pre-approval process is very easy, very quick, and best of all – it’s free! We will pull your credit, gather income and asset information, and run your loan through the online underwriting systems at Fannie Mae, Freddie Mac, FHA, or VA, depending on the type of loan you are getting.
You will get approved for a certain amount and you can start shopping for a house up to that amount.
Once you have decided which house you want, your real estate agent will need a pre-approval letter (sometimes called a lender letter or a pre-qual letter) to submit with your offer to the seller. We will do that for you.
The loan application lists everything that the lender needs to know about you.
Not everything on the application has to be completed – just enough to satisfy federal and state laws and to supply the underwriter with enough information to make an informed loan approval decision.
When you use us as your lender, you can complete the loan application online, in person, or over the phone. If you decide to do it over the phone, it will only take about 15 minutes.
There are a number of different disclosures that must be given to you when you apply for a mortgage. These disclosures are meant to help you understand how the mortgage will affect you financially and legally. The main purpose of the disclosures is to make sure you are as informed as possible about the loan you are about to buy.
Here are some helpful tips to make sure your rights are being protected:
Never sign a disclosure that is not filled out completely.
Do not allow your lender to falsify any information on your application or the disclosures. This is considered to be loan fraud, and is against the law.
If you have any questions about what something means in one of the disclosures, keep asking your lender until you understand completely what you are signing.
If your lender cannot explain what the disclosures mean, find a new lender.
A good lender:
Will not quote you an interest rate before pulling your credit, getting your income and asset information, and discussing the different loan programs with you. It is impossible to know the interest rate without knowing all about your individual situation.
Will be able to tell you what all the closing costs mean (not just the dollar amount of the fees, but what the fees actually mean).
Will be able to explain all of the disclosures to you in plain English.
Will not charge you an application fee, and will not charge you any other fee until the closing.
Will personally attend your closing.
Will be licensed by the state.
Will be approved by Fannie Mae, Freddie Mac, FHA, VA, and all the down payment assistance programs, and will use the online underwriting systems that each of these companies and agencies has available.
Will not recommend that you pay him or anyone else in an attempt to “repair” your credit score.
The seller pays the real estate agent fees, so you should always use an agent when buying a house. A buyer pays nothing for a real estate agent!
Some buyers think they will get a better deal from the seller if they don’t use an agent, but agents can almost always negotiate a better deal than you would be able to negotiate by yourself.
Can a real estate agent sell you any house, or do you have to use the agent who listed the house (the agent whose name is on the yard sign)? Real estate agents have access to the Multiple Listing Service (MLS), a computerized system that includes all the houses for sale. Any agent can sell any house.