Mortgage Basics (FAQs)
Yes, you can apply for a loan before you find a property. The pre-approval process covers all aspects of the approval process except for property information. During your application, you’ll give information about your income, employment, assets and liabilities, which will all be verified by your lender, including an examination of your credit history. If approved, you’ll receive a pre-approval letter subject to finding a property. You can use the letter to show home sellers that you qualify for a certain mortgage amount, which may help in your negotiations to buy a house.
One of the first questions that home buyers ask is “how much down payment are we going to need?” Unfortunately, there is no standard answer. Down payments will vary from 0% (with a VA “Veteran’s Administration” loan) to upwards of 30% (with certain “non-conforming” loans). On average, most home buyers make down payments in the 3.0%-15% range, although your own personal situation may dictate more or less down payment. But be careful; when budgeting for a down payment, don’t forget about closing costs, which could total an additional 2-5%, due at closing.
A seller’s concession is an agreement whereby the seller pays (from the proceeds of the sale) some or even all of the buyers closing costs and/or pre-paid items to purchase the home. This allows a buyer to purchase with less out of pocket expense.
Private Mortgage Insurance. If your down payment/equity is less than 20% of the value of the house, the lender will require mortgage insurance. The insurance policy covers the lender’s risk in the event that you do not make the loan payments. Typically, you will pay a monthly premium along with each month’s mortgage payment. There are ways to avoid monthly PMI, which we will discuss during one of our strategy sessions.
Pre-qualification is the process where the lender will look at a basic copy of your credit report and use the verbal information you supply to determine how much mortgage you can afford based on your income. No accounts or employment information is verified.
Pre-approval occurs when all credit and employment is verified and the mortgage is approved, subject to the appraisal of the property you have chosen to buy.
Final loan approval occurs when the property has been appraised, all documentation is in the hands of the lender and all contingencies have been met.
The total of these items is known as the PITI (Principal/Interest/Taxes/Insurance) payment.
Fixed: A fixed term (for example, 15 or 30 years) as well as a fixed interest rate. The interest rate and term are fixed at the start of the mortgage. The monthly amount for the payment of principal and interest will not change during the term of the mortgage.
Adjustable: Often referred to as an ARM. The interest rate on your mortgage will be adjusted up or down according to current interest rate levels. The monthly amount for your principal and interest payment will go up or down with these rate changes. Typically, the initial interest rate won’t change for the first 3, 5 or 7 years of the loan term.