Being pre-qualified means that your lender has collected and informally verified basic information to ensure that you qualify for a specific loan program and loan amount. Additional documents may be needed to complete an actual application after getting pre-qualified, and a pre-qualification does not guarantee that your loan will be approved.
You don’t have to apply for a loan before searching for your home. However, most real estate agents suggest or require that you are pre-qualified for a certain loan amount – showing that you’re serious about purchasing a home.
Your pre-qualification will state the maximum loan amount that you qualify for. By taking the loan amount and adding the money you plan to use for a down payment, you’ll be able to get a good idea of a potential price range for your home search.
Factors include (but are not limited to):
- Credit score
- Cash available for down payment and closing costs
- Current debt and financial obligations
Additionally, two ratios are also analyzed:
- Housing debt-to-income ratio- compares your projected monthly payment to your monthly gross household income before taxes.
- Total debt-to-income ratio - compares your projected monthly payment to your monthly earnings before taxes and your monthly debt requirements. Examples of monthly debt would be things like credit cards, outstanding loans, child support, or alimony.
In the simplest terms, your credit score is a number generated by a statistical model which assesses your credit risk. Credit scores often range between 350 and 850. In the mortgage industry, your score is used to determine loan approval, terms, and the interest rate.
Major factors that can affect your credit score include (but are not limited to):
- Payment history on past and outstanding loans
- The total amount you currently owe on outstanding loans or debt
- The number of times lenders have reviewed your credit report
- The length of your credit history
- The number of accounts currently in use
- Judgments, bankruptcies, and collection items
Your credit score has a significant impact on your mortgage interest rate and different fees that you may have to pay. In most cases, if your credit score is below 700, you could see a higher interest rate than you would if your score was above 700.
To improve your credit score, make sure you stay current on your bills and debt payments, and avoid making large purchases prior to applying for your home loan – this can improve your score in 60 days or less. If you can wait to improve your credit score, it can lower your monthly payment – ultimately saving you money over the lifetime of your loan
A rate lock is when your lender guarantees your interest rate for a set period of time. This means you’re protected against rate fluctuations for 15-90 days, depending on the type of rate lock you choose. The longer you choose to lock in your rate, the greater the potential effect on your loan rate. Your loan rate can be locked at any point during the processing of your loan. It must be done at least 10 days before closing.
Rates are based on loan purpose, credit history, value of home, loan amount, your ability to repay the loan, and the current market. Ask your mortgage Loan Officer for more information on your interest rate.
Your Annual Percentage Rate (APR) includes your interest rate and any additional costs or prepaids. For example, it can include your origination fee, points, mortgage insurance, underwriting, and processing fees. If the interest were the only finance charge, your APR would be the same as your interest rate. People use the APR as a measurement to compare the cost of their loan against different programs, scenarios, or lenders.
Your mortgage payment due date is listed on your monthly billing statement. This is usually covered during the closing process. Make sure to ask your mortgage loan officer if you have any questions – a late charge will be assessed if the payment is not received within the grace period.
Discount points are fees paid to your lender at closing in exchange for a lower interest rate. In other words, you are paying your interest up front. The initial benefit of buying points is lowering your monthly payment. One point equals 1% of your mortgage amount. If you have extra cash at the time of closing and you plan on owning your home for a significant amount of time, talk to your mortgage loan officer about buying discount points.
LTV is a ratio (shown as a percentage) of the loan amount divided by the purchase price or appraised value of the home. For example: if you’re purchasing a $250,000 home with a $200,000 loan (200,000/250,000=.80) then your LTV would be 80%.
What is an appraisal and why do I need it?
An appraisal is a written estimate of your new property done by an independent appraiser who assesses the current market value, recent sales in the neighborhood, and comparable homes for sale in the market. Your lender needs to know the actual value of the home to approve you for your loan amount. The appraisal is ordered by your lender. The appraisal fee is due on closing day.
In most cases, a home inspection isn’t required for loan approval, but it is highly recommended that you order a home inspection to verify the condition of the home.
ARM) has a fixed interest rate for a period of time before the rate can change with the market. Choosing the best loan type for you depends on how you assess risk and how long you plan to own the property. If you plan to keep the property for a long period of time, then fixed rate is usually a better option. An adjustable-rate mortgage may be better if you plan to sell the property before your rate begins to adjust, since ARM rates are typically lower than fixed rates.
There are multiple reasons someone would want to refinance their mortgage:
- Lock in a lower rate
- Reduce your monthly payments
- Pay off your debts sooner
- Obtain cash for a remodel
- Get cash for student loans
- Consolidate multiple mortgages
- Remove or reduce mortgage insurance
It’s good practice to check in with your mortgage loan officer if you have questions about refinancing your home. Interest rates, financial goals, and life plans change often!
Conventional loans are not guaranteed or insured by government agencies. All terms and conditions are established through your lender. The most common types of conventional loans include fixed-rate, adjustable-rate, and jumbo loans.
A government loan is a type of mortgage that has requirements backed by a government agency like the FHA (Federal Housing Administration) or, in some cases, MHFA (Minnesota Housing Finance Agency). These loans are good options for those looking for low down payment options or those who may not qualify for conventional loans. Compared to conventional loans, government loans generally offer lower down payment options and more lenient credit score requirements.
Closing costs vary by loan type and scenario. We have options for special financing through state programs that can help cover certain costs as well as zero closing cost options for some types of loans.
You decide how much of the home’s value you want to put down up front. The remaining value is factored into your monthly mortgage payment. Below are 3 benchmarks of typical down payments:
20% or more-
The higher your down payment, the better your rates and options will be. You’ll want to be sure that a large down payment won’t entirely drain your savings.
3% to 19%-
Falling within this range is okay. You’ll notice that lower down payments may result in higher interest rates. Also, in most cases, mortgage insurance is a requirement for down payments that are less than 20% of the purchase price.
Less than 3%-
Anything less than 3% can mean you’re enrolled in a down payment assistance program (government loan). They could be a little more expensive (monthly) – but having a low down payment or no down payment may outweigh the slightly higher monthly payment.
VA and USDA Loans can offer qualified borrowers 0% down options, which may not require mortgage insurance! In this case, being able to put little to nothing down can be a big financial advantage. Ask your mortgage loan officer about these programs and qualifications.
Mortgage insurance (also called private mortgage insurance, or PMI) protects the lender from incurring financial loss if the borrower is unable to repay the loan. Mortgage insurance is typically required if your down payment is less than 20% or if you have down payment assistance. Even if you’re refinancing, you need to continue to pay PMI until your loan-to-value (LTV) ratio drops under 80%.
Mortgage insurance costs are included in your monthly payment. They are based on your loan-to-value ratio (LTV), location, property type, debt-to-income ratio, and credit score/history. Ask your lender for more information on how much your mortgage insurance might cost and what options are available to minimize the monthly cost.
Homeowner’s insurance is a form of property insurance to protect against damages to the home and the possessions within it. It is a requirement when you have a mortgage on the house.
At closing, your agent and title company will meet with you to review and sign all the necessary paperwork to finalize your loan. At this time, your closing costs are due. You will receive a closing disclosure showing your closing costs in advance of your closing date. The funds required for closing will likely be required in the form of a cashier’s check or wire. The title company will provide you with this information.
The easiest way to categorize closing costs would be lender fees and third-party fees:
This includes any costs associated with processing your loan; for example:
- Prepaid interest
- Discount points
- Origination fee (covers underwriting and processing fees)
- Rate lock fees
This includes any costs associated with services provided by third-party vendors during the mortgage approval process; for example:
- Pre-payment for taxes, insurance, and setting up a new escrow account
- Appraisal fees
- Title service fees
- Government recording fees/transfer taxes
Your escrow account is part of your monthly mortgage payment and is typically 1/12 of your homeowner’s insurance and property taxes. These funds are collected in the account until they are due to be paid. This will help alleviate the large expenses due for these items at the end of the year. Some loan types require escrowing for taxes and insurance.
It is almost always required to show that you have adequate insurance lined up for your new property. Term and coverage amount requirements may vary. Ask your mortgage loan officer if you’re unsure about your homeowner’s insurance requirements.
Title insurance can save you from unexpected problems with the title of the property or land that you are purchasing. Just because the title has been handed over to you doesn’t mean that you’re the only party with an interest in the title. For example: If someone forgot to pay taxes on the property 50 years ago and there’s a tax lien on the property, then you (the new homeowner) would be responsible for paying that! The title company will perform a title search to look for issues with the title, minimizing their risks of offering the insurance, and ultimately offering title insurance policies for a relatively low, one-time fee.