The mortgage amount is the principal of the loan. It’s how much is borrowed to purchase or refinance a home. Principal can be the purchase price or the loan amount after applying the down payment.
Example: Purchase price minus down payment
- $750,000 purchase price
- $37,500 down payment (5% down)
- $712,500 mortgage amount (principal)
Loan interest is the financial cost a customer pays to a lender for borrowing funds (the principal). There is a portion of the monthly mortgage payment that goes towards the interest charge on the money loaned to you. It is expressed as a percentage rate. There are many factors that impact the interest rate for a loan, such as:
- Market conditions
- Loan-to-value (LTV) ratio
- Borrower’s credit score
- Type of mortgage program (FHA, VA, USDA, etc.)
The term is the length of time you are scheduled to pay back your mortgage. Terms have an impact on interest rates. The most popular loan terms are 30 years and 15 years. 30-year mortgages carry a slightly higher interest rate than 15-year mortgages.
The monthly amount you must pay the lender for the loan obtained. Most of the time, the payment includes the portions for principal and interests, unless its an interest only loan.
Mortgage Escrow Account
A lender may set up a mortgage escrow account where part of your monthly loan payment is deposited to cover some of the costs associated with home ownership. The costs may include but are not limited to real estate taxes, insurance premiums and private mortgage insurance.
A fixed-rate mortgage has the same interest rate and principal/interest payment throughout the duration of the loan. The amount you pay per month may fluctuate due to changes in property tax and insurance rates, but for the most part, fixed-rate mortgages offer you a very predictable monthly payment.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage, also called an ARM, is a home loan with an interest rate that adjusts over time based on the market. ARMs typically start with a lower interest rate than fixed-rate mortgages, so an ARM is a great option if your goal is to get the lowest possible mortgage rate starting out.
Home equity is the value of a homeowner’s financial interest in their home. In other words, it is the actual property’s current market value less any liens that are attached to that property.
Conforming loans are mortgages that meet specific guidelines that allow them to be sold to Fannie Mae and Freddie Mac. Lenders can sell mortgages that they originate to these government-sponsored entities for repackaging on the secondary mortgage market if the mortgages conform to the funding criteria of Fannie and Freddie and the Federal Housing Finance Agency’s (FHFA) dollar limits.
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is a type of insurance that is often required for conventional mortgage loan borrowers. When you buy a home and make a down payment of less than 20% of the home’s purchase price, PMI may become a part of your mortgage payment. It protects your lender if you stop making payments on your loan.
Debt-To-Income (DTI) Ratio
Your debt-to-income ratio, or DTI, is a percentage that tells lenders how much money you spend on paying off debts versus how much money you have coming into your household. You can calculate your DTI by adding up your monthly minimum debt payments and dividing it by your monthly pre-tax income.
Conventional mortgages are the most common type of mortgage. You can buy a home with as little as 3% down on a conventional mortgage. You’ll also need a minimum credit score of at least 620 to qualify for a conventional loan. You can skip buying private mortgage insurance (PMI) if you have a down payment of at least 20%.
FHA loans are insured by the Federal Housing Administration. An FHA loan can allow you to buy a home with a credit score as low as 580 and a down payment of 3.5%. With an FHA loan, you may be able to buy a home with a credit score as low as 500, if you pay at least 10% down. However, some lenders might require a minimum credit score of 580 or even 620.
USDA loans are insured by the United States Department of Agriculture. USDA loans have lower mortgage insurance requirements than FHA loans and can allow you to buy a home with no money down. You must meet income requirements and buy a home in a suburban or rural area in order to qualify for a USDA loan.
VA loans are insured by the Department of Veterans Affairs. A VA loan can allow you to buy a home with $0 down and lower interest rates than most other types of loans. You must meet service requirements in the Armed Forces or National Guard to qualify for a VA loan.
A jumbo loan is one that’s worth more than conforming loan standards in your area. You usually need a jumbo loan if you want to buy a high-value property. For example, you can get up to $2 million in a jumbo loan if you choose Rocket Mortgage. The conforming loan limit in most parts of the country is $647,200.
A portfolio loan is a kind of mortgage that a lender originates and retains instead of offloading on the secondary mortgage market. Appropriately named, a portfolio loan stays in the lender’s portfolio, never entering that web of behind-the-scenes buying and selling. Why does that matter? Because the lender gets to pick the standards for the loans – what kind of credit score they’ll approve and how much money they’ll offer to the borrower, for example – instead of adhering to the standards put in place by Freddie Mac and Fannie Mae.
Refinancing the mortgage on your house means you’re essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you’re left with just one loan and one monthly payment. The refinancing process is often less complicated than the home buying process, although it includes many of the same steps. It can be hard to predict how long your refinance will take, but the typical timeline is 30 – 45 days.
A critical step in the mortgage loan application process is to verify the sources for your down payment, closing costs and assets, as well as documenting income and debts. The lender uses this step to determine your qualifications as a borrower.
Acceptable Source for Down Payment & Closing Costs
Cash in a bank checking or savings account
CDs / Mutual funds / stocks / IRA / 401K
Proceeds from the sale of another property
Depending on the loan type, sometimes the money can be gifted to you from an immediate relative
Common Assets in a Mortgage Loan Application
Stocks, bonds, mutual funds, 401K and retirement accounts
Personal property estimate – cars, boats, antiques, jewelry, etc.
Other real estate or property with equity.
Income and Employment
The lender will want to confirm your current gross income and have evidence of stable employment. Documentation requirements may vary depending upon a number of factors such as the source of income (hourly, salary, salary + bonuses, salary + commission, commission, self-employed, etc.).
Your lender will want to review a list of all your current debts. This along with your credit report will provide the lender with a snapshot of your obligations. The lender will want to confirm that you will not be overextended when the mortgage payment is added to your current debt load.
Closing Fees (Closing costs for a House Purchaser)
There are certain basic costs attached to closing the sale of a house. These fees are commonly split between the buyer and seller, as noted in the sales contract, so you’ll want a real estate expert to help show you through your process.
Costs related to your mortgage to be paid at closing (Mortgage Clients Only)
Loan Origination Fees: This covers the administrative expenses in setting-up and processing your loan. The loan origination fee may be a percentage of the mortgage amount or a fix amount. Lender will disclose fees in a good faith estimate form after applying for a loan.
Points (optional): An option for the home buyer is to purchase points to lower the interest rate at which the loan will be repaid. Each point equals 1 percent of the mortgage amount. For example: on a $250,000 loan, 1 point would equal $2,500.
Appraisal Fee: The fee for having the house appraised may be incorporated into the closing costs, origination fees, or payment may be required by the lender at the time the loan application is submitted.
Credit Report: The lender uses a credit report to determine the creditworthiness of the loan applicant. This fee is often paid when the loan application is submitted.
Interest Payment: Most of the time the buyer is required to pay interest on the mortgage loan to cover the time between the closing date and when the first mortgage payment period begins. For example: If closing is on April 21st. Your first monthly payment begins to accrue interest on May 1 with your first mortgage payment due June 1. At closing an interest payment covering the accrual period between April 21st and April 31st may be required.
Escrow Account Deposit: At closing a payment may be required to fund the escrow account if the lender is paying home insurance, property taxes and/or other expenses out of the escrow account.
Property Taxes: Most of the time the buyer is required to pay the property taxes from the day of the purchase to the end of the year. This amount to be paid will be prorated to the seller and the buyer. If taxes are pre-paid, buyer will have to give the seller the period of time the house is not in their possession. Or vise versa if taxes are yet to be paid.
Transfer Taxes and Recording Fees: Transfer Taxes are usually attached with any type of transfer of ownership on title as well as recording fees. These are fees to be paid to the county where the property is located.
Flood Insurance – (optional or might be required by the lender depending on zoning)
Private Mortgage Insurance (PMI) – (Depending on the type of loan obtained) Title Insurance
DO‘S AND DON’TS WHEN OBTAINING A LOAN FOR YOU HOME
As the mortgage industry adjusts to new financial regulations, it is more important than ever to ensure that the financing of your new home goes smoothly. Approval of your loan is contingent upon your financial profile on or shortly before closing, not necessarily at the time of your application. Changes in your financial profile during the time period between the application and closing dates could adversely
Consult with your mortgage banker before doing any of the following before closing:
- DO NOT apply for new credit or authorize the pulling of your credit.
- DO NOT make any deposits over $500 (except for customary payroll deposits) into your bank accounts.
- DO NOT bounce any checks or permit any account to fall in a negative balance.
- DO NOT make any large purchases, cash advances OR incur significant charges on your credit cards.
- DO NOT quit or change jobs until you have closed on your house.
- DO NOT take it personally if you’re requested to provide additional information about your income or deposits. All information will remain completely confidential.
- DO NOT Pay off any collections or charge-offs before consultation
- DO NOT Change bank accounts or banks unless advised
- DO NOT Consolidate your debt into fewer accounts
- DO NOT Start any home improvement projects
- DO NOT Close credit card accounts
- DO NOT Transfer checking or savings balances from one account to another
- DO NOT Max out or over charge existing cards
- DO NOT Raise red flags to the underwriter (i.e. co-signing on another person’s loan, change your name and address)
- DO NOT Plan a vacation during your loan transaction without informing your loan officer
- DO NOT give notice to your landlord before consulting with your loan officer
- DO NOT open a new cell phone account
- Promptly provide a copies of the following (Every client is different so their documentation request might also be different);
Copies of your personal tax returns and W2s for the previous 2 years
Copies of your full business tax returns with all its schedule for the previous 2 years if you own 25% or more of a business.
Past month pay tubs
Past 3 months of bank statements
- Promptly provide legible copies of all pages of each document requested by your mortgage banker throughout the mortgage process.
- Continue to pay all financial obligations on time (credit cards, car loans, existing mortgage, etc.).
- Provide your mortgage banker with the contact information of the agent through which you are obtaining homeowner’s insurance.
- Communicate openly and honestly and do not hesitate to contact your mortgage banker with any questions throughout the process.
- Provide a copy (both sides) of your earnest money check after it has cleared your bank along with accompanying bank statement reflecting the withdrawal.
- Notify your mortgage banker of any changes to the sales contract (i.e. closing date, sales price, etc.).
- Ask your agent or seller if the property is in a flood zone as you may be required to obtain flood insurance.
- Continue to use the same insurance company
- Continue living at your current residence
- Continue to use your credit card as you normally would
- Keep credit card balances at or below 40% of credit limits
- Call us before doing anything regarding your employment, credit cards or assets.
- Enroll in credit monitoring through a bank or credit union to monitor changes to your credit report.