What’s a mortgage?Type of loan that is secured by real estate (i.e., the home you purchase). Unless you are paying cash for the home, you’ll need a mortgage.
You promise to pay back the lender (usually in monthly payments) in exchange for the money used to purchase the home. If you stop paying, you’ll go into default, which means you’ve failed to meet the terms of the loan and the lender can take back the property (foreclosure).
- Principal – What you borrowed (also referred to as “amount financed”);
- Interest – What the lender charges you to borrow the money used to purchase or refinance the home;
- Taxes – What you pay in property taxes to your local city/municipality and sometimes county; and
- Insurance – What you pay to insure your home from damages (fire, natural disasters, etc.). There is also Private Mortgage Insurance (PMI) which is usually required on most loans when your down payment is less than 20%. PMI is paid monthly until you reach the 20% equity threshold.
Some lenders require an escrow account and some let the homeowner pay their insurance and taxes directly. Always check with your lender to see what’s covered in your monthly payment.
- Fixed-rate mortgage– Interest rate remains the same for the life of the loan providing you with a stable and predictable monthly payment.
- Adjustable-rate mortgage– Interest rate is flexible and subject to adjustments—either on specific dates (3-, 5-, 7-year adjustments) or based on market conditions. An adjustable rate mortgage may provide you with a lower rate in the beginning of the loan; however, the payment may increase over time.
- Government guaranteed mortgages– Both the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) offer loans to help homeowners with income restrictions or those who are currently in the military or a veteran respectively. Typically these loans have lower down payment requirements and less restrictive qualifying guidelines, but they do require you to meet certain criteria. Always check with the FHA or VA for complete details and if you think you may qualify for this type of loan, inform your lender.
Pre-qualificationThis involves providing your lender with some basic information—what income you make, what you owe, what assets you have, etc. They’ll look at your overall financial situation and be able to provide you with a preliminary estimate of what loan terms for which you may qualify.
When you get pre-qualified, the lender doesn’t review your credit report or make any determination if you can qualify for a mortgage—they’ll just provide the mortgage amount for which you may qualify. Pre-qualifying can help you have an idea of your financing amount (and the process is usually quick and free), but you won’t know if you actually qualify for a mortgage until you get pre-approved.
Pre-approvalThis involves completing a mortgage application and providing the lender with your income documentation and personal records. You’ll usually have to pay an application fee, and the lender pulls and reviews your credit. A pre-approval takes longer than a pre-qualification as it’s a more extensive review of your finances and credit worthiness.
Pre-approval is a bigger step but a better commitment from the lender. If you qualify for a mortgage, the lender will be able to provide: the amount of financing; potential interest rate (you might even be able to lock-in the rate); and you’ll be able to see an estimate of your monthly payment (before taxes and insurance because you haven’t found a property yet).
Why get pre-approved? It saves you time by letting you search for homes within your pre-approved, affordable price range. Also, you’re letting sellers know you’re a serious and qualified buyer. Often, if there’s competition for a home, buyers who have their financing in place are preferred because it shows the seller you can afford the home and are ready to purchase. We’ll also go through the pre-approval process a bit more in the next section.
|Mortgage Application||When you apply for a mortgage, you should receive a copy of your mortgage application. The standard form used is called a Uniform Residential Mortgage Application, Form Number 1003. Sometimes it’s just referred to as a “1003.” The lender uses this form to record relevant financial information about an applicant who applies for a conventional one- to four-family mortgage. It’s important to provide accurate information on this form. The form includes your personal information, the purpose of the loan, your income and assets and other information needed during the qualification process.|
|Good Faith Estimate||After completing the mortgage application, your lender will send you a Good Faith Estimate (GFE). The GFE is a form that provides you with an estimate of closing costs (sometimes referred to as “settlement charges”) and terms of your loan.|
|Truth-in-Lending Disclosure||This is required by federal law and provides you with a written disclosure of all conditions, fees and terms of the loan—it also shows the total cost of the loan over the entire term of the loan.|
|Closing Statement||Right before your loan closing date, you should receive the HUD-1 (also referred to as the “closing statement” or “settlement sheet”) and it lists all closing costs. Your lender must provide you this form before you close on your mortgage. The HUD-1 itemizes all real estate commissions, loan fees, points, and escrow amounts and provides information about your loan closing.|